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

Welcome to today's event where we have the pleasure to present Columbus. Today's topic, of course, the financial results from Q1 '25, how the year has started and how you see it going forward. As always, we are joined by CEO, Soren Krogh; and CFO, Brian Iversen. [Operator Instructions] But for now, I will hand the call over to you, Soren.

Thank you very much, Michael, and thank you for all that have joined the conference. Brian and I look forward to presenting our financial results from Q1 of this year for you. To start us off, I will just switch to disclaimer. I will give you 10 seconds to go through the formalities. And I will start by going through some financial highlights and followed up by some observations on what drives the market performance going forward. So the revenue in Q1 2024 ended with a slight decline for us. And the main part causing this are some continued quite challenging conditions in the Nordic market whereas the U.K. continues on a positive trend, and it's up 17% in the quarter. We'll come back to a little bit the outlook for the Nordics. I think we have seen a turning point, and we -- I'll come back to just commenting on how we see that play out. Our EBITDA increased by 32% when adjusted for the extraordinary gain of DKK 20 million from the M3CS legal case we had in Q1 last year. And we think this confirms the robustness of our strategy and business model and also the soundness of the EBITDA15 plan that we presented prior. So we continue to work towards that goal. This means that our EBITDA margin for this quarter was 10.7%, and that's up from 7.9% in the same quarter last year, again, when adjusted for the extraordinary income associated with the M3CS legal case. Our contribution, so direct business contribution increased by 2 percentage points to 25% in Q1 compared to 23% in Q1 2024. And this is primarily due to our improved project execution and also, I would say, a strong cost discipline. I'll just come back to some of the components of that. This is the primary driver of our EBITDA15 plan that you're seeing that gradually kicks in here. The cash flow from operations decreased by 27%. However, again, when we adjust for the extraordinary gain in Q1 last year, the cash flow actually improved from DKK 3 million to DKK 17 million quarter-over-quarter. And again, that underpins the soundness of the development of the business. Next slide, please. Yes. So if I just comment on the development of both the EBITDA improvements, but also the flattish to slightly negative top line. So some of the things driving our -- both top line and profit would be the commercial conditions that we operate under and that there is a price point on the hourly rates, which is developing positively and actually exactly in accordance with our expectations. So that part is good. The next thing is the efficiency. So to which extent are we able to take all the hours we have available to deploy towards customers and make them successful or deployable so that we are actually also generating revenue from it. And that part is also developing positively. We started just a snitch lower than we would have preferred to, but we're seeing a very positive development on that. So that leads to third one, which is the headcount, how many consultants do we actually have available that drives the overall capacity that we have. And as you can see there on the -- both the -- on the right side, especially on the lower one, we have dropped slightly in headcount over the past 12 months, but we do see now that we have reached the low point and we're starting to put on additional headcount again. So here, the -- here is actually the main decision criteria for Brian and I need to look at is how fast do we want to do this? In a normal business environment, we could act pretty fast based on our stock of work and our pipeline. But based on, I would say, the current business conditions, the external factors, we are going forward at a slightly more cautious pace in terms of rehiring. We want to make absolutely sure that we stay on track with the EBITDA improvement program, and we prioritize that quite high. Also given that there is a little bit of a risk that we can see temporary setbacks again in the workload with all of the -- basically the new stream that we see affecting our customers at the moment. So that is the reality that we deal with. So we are starting to act in all the successful business units. We built -- or we have maintained and continued to build out our pipeline. It is strong. We can hire additional headcount, but we need to be cautious we don't get ahead of the curve to the same extent, we would -- if we just saw a really sort of more -- if the business outlook was very clear to us. I think now we are seeing a little bit more of a duality in many of the scenarios. And then a final comment here on the lower left side, I will also comment on the strategic review. We are still in the process. We are still developing the options that have been presented to us. And we will come back when there's something more specific for us to present on this point. And then I will come back to some of this under the Q&A session. Brian, I think we will take the details first, yes.

Yes. Thank you, Soren. So let's move to the financials a bit more detail, our 3 usual slides. Number one is the service revenue per business line. And I actually just did the count. It's the first quarter -- in first of the last 14 quarters, we saw a growth. So this is the first one with a slight decline. So that is, of course, not super, but there is also a tough environment out there. If we look at it per business line, Dynamics, the group ended with a minus 2% in the quarter compared to last year, a slight decline and three, and Dynamics was mainly -- they mainly looked into a decline in our Norwegian and Danish market in the quarter. Entry, a decline of 9%. So that story is that last -- the same quarter last year was extremely good and strong due to some closures and final work in some major projects. And they, as I have been talking about, being in a shifting mode during the past quarters. So we feel pretty confident that they slowly get back on a growth pattern in the coming quarters as well. Digital Commerce, with the same story. They have also been through a big restructuring and have main part of their business in Sweden and in the retail market, which is probably the heaviest headwind you can face in our region right now. So therefore, they ended with an 11% decline. Data and AI continue a strong growth pattern, and we're happy to see that. That is an extremely important business line, and we really are looking for more talented consulting in that business to sustain the growth going forward, as Soren also mentioned. Then let's move to the contribution margin. So I mentioned that earlier on, we saw a 2 percentage point increase. This is one of our absolutely key KPIs. And here, we saw that the Dynamics maintained a strong level of around 26%. Some of you might have might remember that last year, there were a few percentage points higher, but they have been merged with CXE for the first time here in Q1, and that has dragged down a few percentage points on the margin when we look at it combined now. And three, flattish or 1 percentage point decrease. Again, they had a really strong quarter last year in Q1, but it's definitely on the right level, and we feel confident that they will continue on that solid and important high level. Digital Commerce, flat development, 11%. It's an improvement compared to the last 3 quarters, but not compared to Q1 last year. So here, again, we feel confident that they slowly get back on track after a major restructuring and adjustment of the organizational setup. Data AI, they had a bad quarter last year. So let's not talk too much about that. They should be in the around 20s, and that is also a strong level for strategic business line that often will have a higher growth in new consultants that do impact a bit on the profitability during such a steep growth. Good. Then let's move to the -- my last slide, service revenue per market unit. And again, I almost said, Sweden is down 11%. They still see some tough environment up there, ending up in a bit longer decision period of new projects and start of fees. When I talk to people, it's not like we are losing projects based on that. But it's really just a slower pace that we are moving at and that do still have slight negative impact on our top line. Denmark, for the first time in many quarters, a slight decrease of 6%, primarily our Dynamics business that saw a slight reduction in activity in the quarter. But again, here, we feel fairly confident that we slowly will get back onto the growth track again. U.K. continues to be a strong growth market with some good wins, and they're slowly tailing taking over Norway as our third biggest country, and they really continue a strong growth there. Norway is also a bit dull, so to speak. Dynamics is again seeing some heavy headwinds and some geopolitical tension still impacts some of the major decision points up there. U.S., it's a smaller number, but we feel like we have seen the bottom in the past quarters and start to see a slight growth now -- or not slight, 50%, still on a small amount, and we are happy to see that we have made some changes in organization over there and start to see some positive outcome of that. Good. That's all on this, then let's move to the outlook slide. As we announced the 17th of January, we expect organic growth of around 7% to 9%. I think it's important here to say that we, of course, follow that very closely. It's a tough market out there, but we still do see some very positive trends and projects coming in. So I mentioned primarily M3 and some also in Dynamics to see some strong activity, and we expect these to kick in over the coming quarters. EBITDA margin, 10% to 12%. Here, we also feel confident that we are on the right track. That is our EBITDA15 plan and a key point this year, of course, to improve our contribution, our contribution margin, as we spoke about. So here, we also maintained. So we maintain both of our [Technical Difficulty]. Good. Then we move to questions.

Perfect. Let's jump into them. When you are in the process of looking at the strategic possibilities, have you seen any large amount of employees leaving you? And how about applicants? Are you able to get the people because it looks like you want to scale a little bit of up. So the first question here around the strategic process, whether that is impacting your ability to keep employees or maybe even growing them when you need to do that going ahead in the coming quarters?

Yes. So a very important question and something we are actually doing our very best also to handle to take some of the anxiety out of the -- out of an exercise like this that can be there for the employees. And I can say we're not seeing any increased attrition of employees in general at all. So we work with -- we are limited in terms of how much information we can give, but we try to keep them as up to date as we possibly can. When it comes to new hires, I would say it's -- I would split that one in two. So when it comes to functional employees, consultants, it's not causing any delays at all or hampering our abilities to attract talent on the contrary. Some of the more senior positions when we recruit for them, there's definitely an additional part of that conversation where they're very interested in, well, what could the future be once I've joined. And so again, we have to be very diligent in not neglecting this and saying, well, it will be what it will be. We need to really try to explore options with them. On that one, I think it's fair -- there could possibly somebody saying, call me once this is concluded, I would like to see it before I make up my mind. So in fairness, there might be a few here that have delayed our process a little bit. So that's that.

And then to the strategic process, in general, there's how the investigations are going. There's a question, is the uncertainty in the financial market change anything in the strategic process, anything of your thinking, whether the turmoil you're seeing out there or uncertainty? And then there's a question regarding the timeline. Is it correctly understood that you should expect that in Q3. So firstly, how much you can comment on the strategic process, a little bit on -- is there something changing out there by the uncertainty, the financial turmoil? And then thirdly, a very hard question on the timeline, whether you can give that or not?

Yes. Okay. Yes. So I think -- does the current turmoil have an effect? I think we have to say, yes, it definitely does. To which extent, I can't really go into the numbers here, but it does have an effect. It does cause uncertainty in the market, both in terms of the ability to finance and things associated with that, but also things that are associated with future demand, which are harder to predict. However, there are -- when we go through a review like this, we -- I think in most scenarios, it's expected that we would only end up with one at the end. And that's not to say that there are still interested parties to talk to. But I think it's fair to say that the overall impact on an exercise like this is negative.

And then a little bit on the timeline, whether you are able to comment on that or not?

I'm not able to comment on the timeline. I'll go back to what I've said previously. From an executive team point of view or from my point of view, I have an interest in conducting this exercise as quickly as absolutely possible. But still, [ healing ] that we have to do this very well, we have to do it very correctly, we have to look at all things available to us. But I don't think it's beneficial for any company to be in a review longer than necessary. So we are pushing towards finalizing whatever that maybe. There's a separate -- speed is a separate priority for us. So we will push that as fast as we can.

The next question, how much visibility do we have in your backlog and pipeline concerning your organic growth guidance range of 7% to 9%? You alluded a little bit to it. So to get a feel of it and maybe -- and I know you can't quantify, how much is order backlog and how much is pipeline? And I know you can always add some percentage probability to a pipeline, but of course, it's more uncertain in uncertain times. So a little bit about how much visibility you have and maybe a little bit about comments on how much is backlog and how much is pipeline that you expect this turnaround in the growth from the Q1 to reach your guidance?

Yes. Okay. Very good. So just an overall answer first. We have a pretty, I would say, pretty decent transparency of our pipeline, which is not so unlike what we would have under more normal circumstances. And if we look at how we gauge the velocity of our business going forward, it's primarily based on 3 things. The most accurate one we can have, which tells us something about business performance in sort of the 4 to 8 weeks outlook is just looking at our efficiency, our current efficiency because when you are -- when you have the size that we have and we spread a number -- across a number of geographies, we spread across a number of projects and customers, we never see very rapid developments either up or down on this one because it's spread across so many things. So it's always a very slow moving development. So we know that we have now a decent efficiency level to work from, as I commented on before. The next thing that can have an impact is just to look again at the stock of work. Is there anything which is about to expire sort of in the near future, that could have an impact. We have a full understanding of that. Of course, there can be -- it is technically possible to have abrupt changes on them, but we very rarely see that. And then the longer outlook, which is sort of extending 10 weeks and then beyond that is the pipeline, where we also see -- I would say, I do think we see a decent pipeline. And we've also closed contracts already where we're just not fully up to speed yet. So they're not yet revenue generating to the extent we're expecting them to when we're fully up to speed. So the tricky part here in terms of the 7% to 9%, which I also tried explaining before, is our confidence in all of those numbers to now start hiring because we need -- we do need to increase headcount again. And we are going to increase headcount, but how fast are we willing to move forward because there's an inherent risk in that. It takes us time to bring them onboard. It takes a little time to bring them up to productivity level. And if we then see a certain downturn again, that's a risk. On the other hand, if we're now going into plain sailing, that would be nice, but perhaps not quite expected yet. We would be lacking those people very fast. So I think there was another question, what do we prioritize more? The growth on the top line or the continuous EBITDA performance? We do prioritize both, but not equally so. I think we have an extra eye on our EBITDA margin at the moment. And also just because it's prudent because I would like to supercharge the top line growth, but I need something predictable to play against. And at the moment, I think it's a little bit too unpredictable what I have to invest in. So it's not that we don't prioritize the growth. But if I was to choose, I would say it's a 70-30 to the advantage of the EBITDA or something like that.

Yes. Perfect. And then there's a little bit question around -- also there's a question, and I think maybe you already answered it. Looking at your '26 calls, and the question here is you are focusing more on the EBITDA and that's what you can control internally. But there's also a question here. Has the business condition changed since you gave your '26 goals. I think it was the end of '23 or mid autumn -- fall, sorry, '23. So a lot has happened since then. So you are pulling out the business climate that when you gave those targets and until now?

Yes. Correct. We did give those targets or the business climate that sort of defined our strategy was back in the -- in Q4 of '23. So the conditions have obviously changed, but it's worth noting that if you remember, Q4 '23 was not all blue sky either. That was post Ukraine-Russia, that was inflation driven, much worse, I believe, than now, trying to remember exactly where we were. I think the interest rates was up already back then. You will remember better than me, Michael, you track these things. So it wasn't a plain sailing business environment at all. And what does it mean for us? It meant that we already expected the growth rate of the market to be quite heavily reduced. So we have that in our strategy. So I'd say we had most of it in our strategy, but many things have changed, but the overall market growth, which is really what we have to consider because we have a history of beating the market growth by approximately double up in the quarters over the last couple of years. So we did know that, that market growth was going to be quite heavily reduced. And I think that's sort of where it's been. So part of it, we expected the trade tariffs and all of these things, I did not expect to this...

[indiscernible]. So I would have liked to know -- did you have any comments, Brian? I saw you were...

No, no. But it's probably fair to say the headwind has been a bit harder than expected at that time. But on the other hand, I still think we believe in our goals, and that's what we fight for. And if we look at some of our good colleagues out there, I still believe that we are beating somehow the market, however you do it. So I think it's a fair comment, but we try not to use it as a nice excuse internally at least.

And I guess going back to when you announced the target, a lot of that was internally driven. It was an efficiency measures. It was prices. Maybe also commenting a little bit about that in this quarter because the margin looks pretty healthy. Efficiency is the same. The people you send out to -- how many people you have out there, but still margins are going up without efficiency going up, contribution margin is going up. Can you kind of allude on that. Is that cost consciousness in the rest of the organization? Is that better price is coming from what you also were targeting to maybe move to a little bit of the better and higher margin projects as such. So a little bit of comment on efficiency not moving, but actually, you're moving on margins, at least when you exclude the legal case from last year.

Yes. And there are a number of factors. So I think the hourly rates we're able to achieve because we work for the right size customers in the right sectors is definitely a driving factor. I think also the quality of work, which means that we have -- so we have no issues with guarantees or anything like that. It's a major component. I think subcontractors is a separate topic, which we worked with a lot over the past couple of years. . So sometimes, we will use subcontractors for specialist reasons of peak demand or something like that. But I don't think it was -- had been well enough managed in the past. So subcontractors specifically are giving us more of a -- we are very wary of having sort of pass-through revenue, which contributes negatively. So we're able to see the subcontractors we have now contribute to our EBITDA15 plan. Then I would say, as a specific comment too that you said we had the same efficiency as last year. Now it becomes a little bit technical, but I'll try. So that's true. We have the same efficiency. But 2 things come into play here. The first one is that the redundancies that we made, and we already talked about previously, we are still carrying some of those costs on the books in Q4 -- in Q1 -- sorry, in Q1 this year. So -- and as long as we carry them, the cost, we also let it show in the efficiency because that's the only way of looking at it. If you paid for something, you might not be able to deploy it anymore, but we still look at it as part of our efficiency because otherwise, we cheat ourselves. So that's -- that's one part of it. Then the other part of it is -- this is where it becomes technical. We also, as part of that exercise, went through some of our managerial resources or support resources. We thought we're working so closely with customers that they should also have an efficiency target, and we've done this successfully before. So now we did it again. So we took a number of people and say, okay, you don't have an efficiency target right now, you're not direct customer facing, but you should be, and then we add a target to them. When we do that, then immediately, our efficiency actually drops on the other side. We're not -- we don't have a higher cost, but we make those hours available for selling. And if they're not sold from day 1, which they're not, the efficiency will go down a little bit until we convert that into true revenue. So we're giving ourselves a little bit of a larger engine to work with, and that affects it too.

Makes sense. It's a reallocation.

Yes. But we decided not to bring that into, let's say, the report because -- some others put some special items line, we prefer not to use that one. And then I can see there is a single question regarding if people have been laid off if they're not just continuing working. And unfortunately -- that will also be my take, of course, but it's not always unfortunately, how it works. And there's also different laws in Sweden, Norway, Denmark. So often, we see when people are made redundant. It's rarely that they've contributed the last 2 or 3 months to the business for different reasons. Yes, so it is a bit expensive to move downwards the ladder, so to speak.

And then there's a little bit of more detailed questions on the growth here in Q1 '25. How much is this geopolitical, meaning clients may be having a little bit of a prolonged process? How much is it -- how much you build customers? And is the effect of the firings you did or the personnel reductions you did, that you actually can't go out and build those maybe with a low efficiency, but at least you would have been able to bill them for some work done, maybe so. So a little bit of a question whether what is impacting the growth here the most?

Yes. Okay. Well, I think the first thing, Brian and I have to say is we rarely prefer to blame external circumstances by our results because it just -- it doesn't lead to anything good. So we take responsibility for the results as they are. Could we have had a higher top line growth under the given circumstance? I believe we could, but not while still developing so positively on the EBITDA margin. So it would have been -- so we have slowed down the intake of employees. We have firmed up our approach to subcontractors, as I said before. And that is sometimes at the expense of revenue. So imagine, we've taken in a number of great consultants that, that would have been possible now. We could have sold some of them some other time. And that would have always given us a top line contribution, but it would probably have pulled us back in the short term on the EBITDA margin. And I also have to say, I believe in sort of -- in -- recognizing sort of the period we are in. There is an advantage to saying, okay, now business conditions are tough a little bit on the outside. So let's do a major push on the EBITDA15. And then as soon as we see a shift, we do a major push on the revenue. I think there's a little bit of -- I have 150 managers throughout Columbus. And if I said, yes, a little bit of both, a little bit of both would be nice. That's not a clear signal from us as an executive team. So I'm trying to be as clear as I can. And at the moment, we have asked them to be a little bit cautious, and that has an effect on the revenue side. Another way of looking at it would just be to say, do we know of customers that have been negatively affected of the tariffs, which is much more sort of practical and we do. I mean, so there are U.S. customers of ours that have big exports to Canada. There are some here in Europe that may not be super hard hit now, but unless something is resolved, they think they could take some kind of a hit and they've slowed down their investments somewhat. So we do see some specific examples from time to time.

Perfect. And then what is your exposure to the public sector. I guess the Danish growth, if you heard a little bit from your competitors, it looked like the public was better than the private. So how are you exposed actually in your business. I think to recall reminding when we have discussed it that you are much more private than public. Is that correctly understood?

That is 100% correct. So we do have some very few public sector customers, especially some in Sweden. But I'm going to go out on a link here. We don't even measure it. I think it's less than 5% of revenue. So we are a private sector company. And then I can see there was a follow-up question, Michael.

Yes. This is the 62% efficiency on billing. Does that mean you have decided to say no to orders because of too low profitability?

Yes, I understand the question, and it makes us sound like we are crazy if we only have 62% out there, but I actually have to answer, yes, we still say no. We're not managing. If we just go out there and lower prices, we're running the price points for all eternity, and we continue more or less the path that we were on. Of course, we might be in some business units in some country where we are significantly lower than 62%, we would be willing to perhaps contemplate a deal we would not under normal circumstances. But I don't think the correct response to this for us would be to just lower the prices, lower the prices. That's not a strategy.

Perfect. [indiscernible] it was the question. I think I'm not to your strategy. And then lastly, a question from me. The Dynamics -- or sorry, the ERP systems. We have talked about this that, that is a good area right now, and it was a good area with higher growth because of all the -- because of all the supply chain issues. And I guess this -- this hasn't lessened less. I think the company now needs to know where it produces everything, where it sells everything. Any thoughts about that because I think in Microsoft, you saw a small slowdown in their numbers in the 365 Dynamics business, but actually still a pretty strong growth. So any thoughts about your main area that ERP is going forward?

Yes. And I think, Michael, maybe we should make a note and I would like to bring a few slides next time. But let me just try to do a very quick -- I just came back this Saturday from spending a week in the U.S., last week with some of our major software partners. So two things. We believe as a company in Columbus and our suppliers as well on being very sector specific. So the service we provide, the software we provide has to be highly customized for the industry verticals that we work with, which is also why we don't do public finance and all of it. We've chosen some that we are really good at. That has been sort of the winning formula for us in the past 5 years. . Now we see something in addition to that, which is going to be super interesting in the next -- I'm going to say 5 to 10 years, and it's probably going to start really kicking in, in a year or 18 months from now. It's just a very rough prediction. And that is the era of [ agemtech ]. We're going to call it that, and then I'll come back in a later presentation what it means. So what you should imagine is that today, all of the software platforms we provide have their own interface. It can be browser-based or it could also be separate. But essentially, there is a form that employees will work with. There's a graphical interface that we work with, which is specific to each platform. The future probably looks a little bit different and especially according to Microsoft's view. This thing about understanding what does headless mean? Headless means that there is no specific UX for each platform. It means that you interact with it, it could probably be through Copilot. You interact with natural language. So you're not sort of in this form-based regime as before. And the most abstract thing to get your head around is that you mainly as a human being are not concerned with the transactions themselves, but instructing an agent and telling the agent what to do and how to deal with these transactions, going forward, and then this agent entity will do the actual work. So it's a major shift, and I see a major upside in activity levels for us because this is a completely different way of working and building organizations and operating model design, which will be very profound, I think, even if only 30% Microsoft's vision comes through within this, it will be a profound way of -- or a profound level of change. But I think we'll -- if there's an interest for it, it becomes a little bit technical at some point, but we will try to do a 3-slider on it at some point.

Yes. But I think that was the last question. Thank you to you, Brian, and Soren for taking us through the results and through the questions. I think we have a lot further on by how your thinking is about the future. So thank you very much for that, and thank you for the people listening in and asking very good questions.

Thank you.

Thank you.