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

Welcome to today's presentation where we have the pleasure to present Columbus. Today's presentation will be around your Q3 '24 results and of course, the guidance for the rest of the year. It looks like solid momentum, and I don't know, challenging market conditions, at least if we see generally in the IT sector. As always, to help us through the presentation, I'm joined by Soren Krogh, CEO; and Brian Iversen, CFO. You are very welcome to ask questions in the box down below, do it in Danish and English. If in Danish, I will try and translate to the best of my abilities and do it during the presentation, but we will take the main part of the questions in the end. But I will hand the call over to you now, Soren.

Thank you very much, Michael, and good afternoon to everybody. Yes, so we will be presenting our Q3 results to you, and I will start by presenting sort of financial highlights for the quarter. Then Brian will go into a little bit more details on the segment notes to elaborate a bit. And then I will finish off with our guidance for the full year, which will then be followed by a Q&A session. So let's start by sharing the financial highlights for the third quarter to just get us started. I'll just give you a minute to take in the disclaimer. Yes. Okay. So in the third quarter of this year, we grew by 8%, which took us to a total revenue of DKK 371 million. And the growth was primarily driven by continued progress. We've also seen that in previous quarters by our Dynamics business line, which is our largest business line, our CXE. I'll just take a second to explain. CXE is a customer experience acronym. So it basically spans CRM systems, marketing automation and also like field service platform for technicians, et cetera, and our data and AI business lines. If you look at it geographically, sort of what drove the growth, it came predominantly from our Danish and our U.K. market unit. And this also means that for the first 9 months, that takes our growth to 10% for the first 9 months in combination. The EBITDA result for the third quarter in isolation amounted to DKK 29 million, and that is a growth of 42% and takes us to an EBITDA margin of 7.9%. That's an increase of 1.9 percentage points compared to last year's third quarter. And just for those that are perhaps looking at this the first time, the third quarter for us, it's quite important that, that entails the summer period, which we -- which has an impact on our seasonality, I would say. And for the first 9 months in combination, our EBITDA increased by 47%. The efficiency in the third quarter reached 60%, and that is at the same level as Q3 last year. But it actually marks an improvement, you could say, if we take the quarterly results for Q1 and Q2 this year were actually the first 2 quarters since 2021, where we did not manage to improve our efficiency level. So now we are back on at least matching last year, and we're expecting to see a little bit further improvements of that KPI into the fourth quarter. Our recurring revenue increased by 15%, and that made up a total of DKK 59 million. And profit before tax increased by DKK 3.8 million, and that is mainly driven simply by the improved EBITDA. Our cash flow from the operating activities continued to show strong signs, ended at DKK 57 million. And yes, the improvement is mainly due to a positive development in our trade receivables, and an overall, I would say, growth of our business. So, in conclusion, we are fairly satisfied with the results for Q3. It is a challenging market that we are operating on, but we are successful in navigating that. We're seeing that the focus we have on improving our EBITDA margin works. So the levers that we have chosen work. And we're going to continue down that path both next quarter and in '25 and '26 as we've laid out in our EBITDA 15 plan previously. And that plan sees us reaching an EBITDA level of 15% by 2026. Okay. And I'll just go to the next slide here. A few operational highlights. We would just say that we see a benefit in terms of -- if we say that digital investments for our customer segment are, in general, a little bit more hesitant. We simply see that the areas of ERP, but also data and AI are such key drivers for their competitive edge going forward that they're not really halting those investments. We benefit from that. We also see that we can continue to have a very high win rate, which is important to us because it sort of is a testament to that the strategy is working. We are very strict on only bidding for the customer segments that we've defined, both the size, the project size, the industry vertical, the geographical footprint have to be right for us to bid on those projects. When we stick to that, we have a very high win rate, and that has benefited us well. And then we've had a lot of effort and focus on improving the direct project margin. So basically, the direct margin derived from a project after paying the direct costs. That has included improving our fee rates, improving the way we use subcontractors, improving quality, so we don't have to do as much rework. And that has really helped us, and that has helped lift the EBITDA margin despite this little setback in our efficiency that I talked to earlier. People side, we've appointed Beatrice Silow as a new CMO. She joins us from Nexer as a very distinguished career. I think she's going to really challenge us on the marketing profile, and that's exactly what we want. So basically, a little bit of a refreshment of the positioning coming up as soon as she has landed and made her initial analysis. We've run a pretty large accelerator program. Accelerators are fairly new, freshly educated, but with some business experience. We take them on board. We put them on the -- back on the school bench for a while, and then we bring them out to our customers. Very successful program, 40% women this year. Obviously, it should be 50% at least, but 40% marks a progress for us. So we are pretty happy with that. And then it's also been a period of a lot of negotiations and focus on our partners. The picture here is from summit that was held in Las Vegas for 1,500 partners, people from partners. We invest a lot in that, being close to our big technology partners. And particularly, Infor, as you can see here, has completely sort of redefined how they work with partners and us being their largest partner globally for M3, we were invited to sort of codesign that. And we think that, that has gone very well. Okay. So now, Brian, over to you, and let's go into the numbers.

Thank you, Soren. Let me -- I have a few slides where I would like to double-click on some of the specific measures that we are looking at. Firstly, the business line revenue split. And as Soren mentioned, overall growth of 8% for the quarter which we -- overall is very happy about seen in the light of the current headwind we do see in some of our markets. It's a strong achievement. Dynamics ended at 8%, with especially U.K. and Denmark as strong markets where they continue to gain market share. M3, as you can see, is a bit down in the quarter to 3%. They actually had a strong H1 or okay H1 year-to-date, they are still on 10%. They are shifting from some major project that is finalizing and moving into new projects, and that does sometimes means that there is some slight delay between major projects. Digital Commerce, 2% is not much, but it's the first quarter this year that they actually are in plus. We had the first year -- the first half, minus 10%. So we do start to see some improvements after the major -- not turnaround, but adjustment we made to the business line during the first half of the year, especially Q2, and that is starting to pay off. Data AI and CXE is continuing the strong growth pattern as we have seen also from last year. And that is key for us to deliver this additional service also within cross-selling with our major projects in our ERP cloud business lines, Dynamics and M3. So overall, definitely improved and still a good momentum and strong growth in the first 9 months of the year. Good. Then let me jump to the bottom line or what we call the business line contribution and contribution margin. This is a key KPI for us also on our new heights growth or profitability journey. As you can see, again, Dynamics is on a strong and solid level, 30% for the quarter, 27% year-to-date percent contribution margin that is close to a strong good level where we would like them, definitely. And then on the other hand, M3 goes in line with the revenue slowdown in Q3, a bit too many people on the bench to be fair in this quarter, and therefore, the bottom line or the contribution margin also dropped to 13% year-to-date, they are still on last year, but we are looking into some measures, both on the sales side and the rightsizing of this sizable business line. Digital Commerce is up to 12%. Like on revenue, they actually started the year quite lower also in the minus level. So that's okay. That's improved. But still we need to move upwards on that one. Data AI as well are back on track. They also, as you can see, year-to-date, on a 12%, now 20% for the quarter, meaning that the first half, they have moved upwards. And both Data AI and CXE did see a slow start on revenue and a too low efficiency, as also mentioned by Soren the first 2 quarters, as you saw, had a lower efficiency than last year, and that do affect our bottom line. So overall, for the quarter, a 2 percentage point improvement on our contribution margin, which we are very happy about and what is one of our key parameters to move towards EBITDA 15%. So it's approved, but it's hard work, and it's turbulent times, but we are constantly adjusting the organization and looking into how we the best way use our resources also cross-border. Good. Then let's move to the next slide. Efficiency is more or less covered, as Soren mentioned, maybe not super success, but at least we are back on track for the quarter. The quarter in itself is a low efficiency quarter due to the holiday or the back end of the holiday season. It takes some time to get back on contracts in the Scandinavian market where holidays is often in July, August, a bit September or at least starting during September. We do expect a continuous improvement also in Q4. Recurring revenue, 18% growth. That's more than double up than our service revenue. And that is also one of the new height strategies to increase our recurring revenue size, and that has to grow in a faster pace than our service revenue. So we are happy to see that development. And as Soren mentioned, that's now 16% out of our total revenue. Good. Then let's move to my last slide. That is where we split the revenue on market units or countries. And Sweden is the country where we do see the biggest headwind. It's also our biggest country, around 27% of our total revenue. We start to see some spring signs, but it has been tough, and we are working hard on it. In Sweden, it's basically all our business lines that have been down in slight negative growth percentages. Digital Commerce, which you also saw earlier, minus 26%, but also M3 have been hit there and M3 is that's one of the -- by far, the biggest market for M3 is Sweden. Denmark, 22%. We continue to have a strong growth in Denmark. Dynamics is one of the big contributor to that. And we do gain market share, and we do see that we are involved and win bigger contracts, also mentioned by Soren, and I think we are quite happy for that development and goes very well in line with our strategy in the coming years as well. U.K. growth of 35%. That is including the acquisition we made in the beginning of the year of Endless Gain without that 27% on the back of a high growth also last year. And this is great to see. It's also a big chunk of that is from Dynamics, 62% of our business in the U.K. is actually Dynamics business line, and they grew by 17%. So it's good to see. And as we all know, U.K. do also see some headwinds. But on the other side, it's a great, nice big market where we do see that our qualities come to its right. Norway, flattish during the year. Again, we start to see something at the horizons, but we are cautious and, of course, also take our measures there. And U.S. is so small. So some big and smaller projects coming in out does quite a lot on -- at least on a quarterly basis there. So overall, as I said in the beginning, we are actually almost proud of the revenue growth this quarter compared to what we see in the market, what we read with some of our colleagues out there, how it's going. But of course, we are also putting the bar high and are aiming for a solid growth during the year. Yes. That's our fast review of some key numbers, and then I'll hand over to you, Soren.

Thank you. And I will just reiterate the outlook we have for the year 2024 in totality. So in terms of organic revenue growth, 8.4% -- sorry, 8% to 10% and an EBITDA margin of 9% to 10%. Yes. And as Brian was saying, and perhaps in conclusion, as you prepare any questions, we find this fairly satisfactory. I believe you said almost proud, Brian...

There is a lot [indiscernible]. I know.

I rarely hear that from Brian. But yes, let's just expand on that a little bit. What we would like to see here is the combination of the improvement we make on a contribution margin. So on the direct level of the cost going into the project, which has already improved. And then we know from previous years that we are capable of operating at fairly high efficiency rates across the company. So we have seen 65%, 66%, 67% previously. And now with this sort of market condition turning a little bit worse, we -- as you can see, we've gone down a little bit. Now we've stabilized and we're starting to see them tick up again. And what we, of course, would like to see and what would hopefully make Brian really proud is when we have the two in combination for the full effect and to see what that does to the EBITDA margin. Yes. And I think with that, it's over to Q&A, Michael.

Perfect. Let's jump into that. Can you elaborate on the Data and AI growth? What is under this business line? And what is primarily driving the growth? And do you expect it to continue?

Yes. Okay. So if we look at what the Data and AI business line does, it spans a variety, which both includes what I would say, very traditional business intelligence for those that are used to that. So basically creating transparency in a business, simple automation, RPA, automation style, machine learning and then has also started to conduct more and more business when it comes to more modern AI tools. And some of the new business for us consists on actually phasing in the technology, which is baked into the big software platforms that we help implement. So that could be Dynamics, that could be on M3. Microsoft info, they're continuously launching more and more functionality, but it's not that easy to adopt. You need a plan for it to roll it out to assess security issues, et cetera, et cetera, and that generates work. It's a fairly big business unit for us now compared to totality, but I'm expecting that they will continue quite high growth numbers next year, both given the demand, but also given that it's -- we're just getting started, and we see further potential for it.

And then if we should understand, is this a group -- is it a segment where you go out to your current clients and implement some of these tools and so on and systems already, meaning you are upselling from your current systems dynamics and so on? Or is this also going out to companies you are not in, thereby also actually being able to create a business for you in the future, if you understand what I mean? Is it a group that if you are very good at this one and you get hired in, you're also more likely maybe to get the bigger projects afterwards. And by bigger projects, of course, I know it's probably big projects here, but the big, big implementation projects and so on.

Yes. So we do see a lot of the projects being a combination between several business lines. So there's definitely synergy for us. To start with, I would say it was more a case of where we already had these big ERP engagements, we could then bring our Data and AI capabilities on board. And now we're starting to see also the opposite because there are actually some of the projects that will start with some sort of explorative efforts where they have the right skill set. So they are the first on the moon and then the larger projects from ERP will follow. To your last, I think where you started your question, will these -- will Data and AI sell to customers all of their own? They definitely have the opportunity, but we need to think carefully about that because we chose our industry verticals with a lot of consideration, the customer segments. So we might let them venture into something which they have a little bit for themselves because there are certain areas which they could attack. But I would -- this is a bit of a politician's answer, but there's both the added upside of business, but there's also something about keeping the group together to get all the synergies out of it. So it's a constant evaluation. So I can't give you a definitive answer yet on that.

No, no. And I was looking for this exploratory. If that was also a part, then that's a way of getting in and getting the bigger contracts. So we could use this as a little bit indicator, the higher growth there for potential in the future. Perfect. Efficiency rates are flat, but margins are up in Q3. What are the main drivers behind this? Any goal for the efficiency rate in Q4?

Maybe the first one, let me just take that one. And that's a good question because normally, you would say efficiency that goes direct to the bottom line or away from the bottom line. But on top of that, we also have pricing that we are working hard on to make sure that we get that right. As I also mentioned earlier on, we have -- we are looking a lot on contract profitability back to pricing. And besides pricing, there is also the delivery mix where we can both use the seniority, let's say, what kind of seniority are we putting on contracts and what price do they come with and also our offshore functions that we have in Czech and in India. So there is more into it than just efficiency. But of course, efficiency is one of the bigger, bigger indicator on the bottom line as well.

I think if we look to your goals and you gave some goalpost, it was around 1/3 of your movement from doubling the margins that should come from the efficiency. Is that about right?

Yes.

So maybe I thought about efficiency as also something they are billing, but this is ours simply. Is that our you're measuring here? Or is it hours...

It's 2 hours.

So if you get a higher pricing on it compared to earlier quarter and a better -- then we would see that as moving their margin up, but actually without the efficiency.

Yes, you could say it like that, definitely. So it's a mix of different levers.

Okay. So it's hourly. Perfect.

Yes.

Then there's a question. Is there less competition in the Danish market compared to Sweden?

So I think I would actually say I see the competition levels as being fairly identical, but the demand side in Sweden has been much harder hit. I think we are simply experiencing that the Swedish economy has been less strong for quite a long period of time than the Danish. And that has led to more of an investment slowdown from the Swedish companies compared to the Danish. Yes. And so that's the first answer to why the results are the way they are. And then you could say the second, which is more Columbus internal, is that we have this business unit in Sweden, which is very large in Sweden, which is called Digital Commerce. They mainly -- or what they do is they do all sorts of e-commerce systems, both business-to-business, business to consumers, product information management, all of these catalogs and for those that are familiar with that. They are very exposed to the retail sector. And the retail sector is the sector that slows down the fastest when the economy is not with them. So I think we are experiencing a little bit extra on that front since we're not that exposed to retail in Denmark, for example. So -- but overall sort of macro level, I would say same level of competition, but Swedish demand has just been harder hit than the Danish.

Yes, because the next one, that's actually with the headwinds in the IT sector, do you see an overall more positive Q4 in the Nordics or in any of the markets from your chair, and I interviewed you and I have also listened to you speak. So you're kind of indicating green shoots or something like that in the Swedish market without making any promises. But -- so maybe you can talk a little bit about the Nordic markets going into Q4, whether there is somewhere you see some improvements.

Yes. Yes. So a couple of things. Before we get to the spring signs, I would say, first of all, I mean, Q4 is the quarter we are currently in. And one of the things we've introduced over the last couple of years here is that our planning ability and our ability to look into the future is improved by quite a lot. So we have a very good idea about what we're going to do in terms of work for the next 10 weeks. So we have -- we can sort of see the bottom level performance. We know exactly -- and then, of course, there's a few things that need to come on top of that. But that gives us some level of indications, which I would say indicates at least at a level of stability is guaranteed. Then when we come to the spring signs and will we see further improvements, I think it's interesting to talk about Sweden again because that's really where we want to see a pickup. And we measure a lot on early-stage pipeline. So how many new customer dialogues are we engaged in? What stage are they in? Have we just had the initial talk or have we commenced sort of architecture reviews, have we started commercial negotiations? How far have we come in that, which are all precursors to actual business. They need to take place. Otherwise, there is no business. And we can just see a very good pickup in those discussions. Now we do need to turn them into actual business. And for us, there's a timing issue here. So I actually believe that we can increase our activity levels. I'm a little bit -- because now we're into November. So how much of an impact can this have on Q4 and how much of this will flow into Q1 next year is definitely a question that we're seeing. Yes.

Perfect. And maybe I answer -- maybe a question you will not answer, but looking at the efficiencies and you stabilized that you took actions on the security side and now they are stabilizing. But is Sweden the real answer to again seeing efficiency increases, if you understand what I mean, are you actually pretty satisfied with the rest of the business? And if you fix the top line or the capacity in Sweden, you again would be on the right path. I know it's a little bit of a hard question. I don't know whether you want to answer that.

No, no. I'm perfectly fine answering that. And the first thing I have to say, if you ever hear me say I'm satisfied with efficiency, there's something wrong. So that will be a forever ongoing optimization game. There's definitely a lot of top end potential in Sweden, like which could -- given the population in Sweden for us in terms of how many consultants, it brings up the overall average. But there are also units in Sweden that are already doing quite fine. And there are also some units in Denmark and the U.K. that could deliver a more top end potential. So for us, it's -- I would say it's -- you saw that we are now on 60% compared to -- which is the same level as last year. And I believe it was 62% in Q2, Brian. So it's like, okay, can we eat another point? We don't need much more than 1, 2, 3 points -- percentage points extra for this to be really interesting for us an improvement. The consulting model is built in such a way that your costs are fairly locked in. So the marginal percentage points of efficiency will fall to the bottom line, of course. So we strive to improve that further in Q4. And I would -- I'm fairly optimistic. I can go as far as to say I'm actually fairly optimistic on achieving that. And then that has to be seen, again, in combination with how many FTEs do we have and comparing that against our original plan for the year. And we have hired slightly less people compared to what we thought in the end. So there's also that aspect of it. And...

Is there any effect? You made some efficiency measures here in Q2. Are you seeing the full effect here in Q3? Or do we also expect to maybe see some -- a little bit of that also showing up in Q4?

There's a little uplift that will not hit us in terms of how we measure it before Q4 because we made adjustments in June of Q2, and we -- due to the termination period, they continue to be in our books, although we took the cost in Q2, they continue to be in our books the way we measure efficiency in Q3, and then that will -- yes, depending on which country you're in, if it's 2 months, 3 months, 4 months of the termination period, yes.

That makes sense to assume it's [indiscernible]. Then there's a question is the integration with Endless Gain going after the plan?

Yes. And that is actually a fairly short answer because that will be yes. So this has been one of those acquisitions where it just made sense to us and it made sense to them and the integration has been fairly straightforward. They came with a lot of good customer names. They are very much operating on a recurring revenue basis, not just on time and materials. So they've taken that stability with them. And we're using those -- that momentum to take them across into existing Columbus customers.

And let's end with a question for both of you. We will turn to the cash flow. One for you, Brian. Is this sustainable? Or was that a little bit of on time because it was quite a strong if you're also looking, I think you're doubling your operational cash flow or something like that from last year. Is this sustainable? Is that a new ratio we should expect? And to Soren, sorry, it was fine I, of course. And of course, you saw -- are you going to use those money for some M&A? You started opening up a little bit earlier this year for maybe looking at some targets. But let's start with you, Brian, and the sustainability of the cash.

I can probably promise I will not double up every quarter. That's for sure. But that said, we do have a strong cash flow. We have a better cash flow than last year. And I think there's -- for me, that's the basics. It's a sound business. There is money flowing into the bank. You can see our total debt is going down. That's good. Over the quarters, there is, of course, some fluctuation in our working capital, depending on if it's ending on a Sunday or a Monday and so on. We don't comment on that specific. So this quarter, there was a slight tailwind because the same quarter last year, the working capital was a bit worse. But overall, we are improving our cash flow, and that is going as improved earnings, definitely, yes. So not a doubling, but a constant positive development.

And now to you, Soren, because I saw you paid down your overdraft account. So that is normally sometimes we can speculate in the market and for M&A activities. But I know you can't really comment on it. But a little bit about what you see out there in the market for a potential of using that. Are you seeing something interesting out there and are the prices right now?

Yes. So I would definitely say sort of we're going back to the cash flow that Brian just alluded on, it is a strong cash flow and our debt levels, I would consider as downright low. We have -- so there's definitely a financial muscle to be used. I would say, is there anything interesting to look at? Yes. Is the price about right? Yes, it has come down. I think it's more reasonable than compared to a few years ago, I didn't find it very attractive. So I think the answer would have to be, over time, you should expect some level of activity from us. I think the good question to ask ourselves and as you acquire companies in the consulting business where people are involved, there is a tremendous amount of work involved in integrating and making sure you don't lose those people because you're not buying factories or IP, you actually need to secure them. you successfully integrate those people. And we ask ourselves a lot, what is the best size to work with because some of the work is actually the same if you buy 50 people or 500 people at the time. So there might be a consideration on our side of what size of targets should we be going for in the future. And that's something we will consider carefully.

Perfect. I think that was all the question. Thank you to you, Soren and Brian, for taking us through your results and answering questions. May everybody have a nice day.

Thank you.

Thank you. Bye.