Crealogix Holding AG (CLXN) Earnings Call Transcript & Summary

Good morning, and welcome. Thank you for joining and your interest in CREALOGIX. Let me start with some key messages with reference to the content of the presentation. The financial year '21/'22 was challenging for the CREALOGIX team with historically high investments in product development and a decline in revenues. And at the same time, new customer demand slowed down due to the uncertainty in the market. 18 months after the introduction of the Funding Portal program, we are now counting 9 out of 17 German state development banks among our customers. That puts us in the pole position for further growth in Germany and Europe. It was the right decision to invest CHF 20 million in the development of this platform in a new financial service segment which is growing. We've continued to trim our cost structure, thanks to the reduction of complexity. We expect the cost reductions to have a full impact in the financial year '22/'23. We have also aligned our effective cost base to a conservative revenue plan. We were in the position to cut cost thanks to the continued consolidation of the product portfolio and thus, the reduction of complexity. In parallel, we have continued to focus on delivering innovation to our customers. We had another year with a high number of successful go-lives with existing and new customers, many of which are now in a multiyear engagement with us. They build the foundation for future growth. With high investments and a slowdown in demand in the financial year '21/'22, our profitability was impacted. Onetime investments have been completed and demand is picking up, while we have freed up capacity. Moreover, we have a defined set of measures in the works focusing to improve EBITDA. Let's talk about the key figures of the financial year '21/'22. Revenues year-over-year are down by 14%, in local currency, minus 12.5%, mainly driven by a decline in nonrecurring revenues such as onetime services, services outsourced to partners, goods and licenses. In the category recurring revenues, we saw an expected decline in maintenance revenues due to the transformation towards SaaS and the consolidation of the product portfolio. EBITDA is reported at minus CHF 9.3 million. Previous year was plus CHF 3.3 million, which can be attributed to high investments and the decline in revenues. Cost measures did compensate for some of the effects but will be fully enforced in the financial year '22/'23. R&D peaked at a historic high with 31% of revenues, mainly driven by the state development bank program with CHF 10 million spent beyond a normal year's product investment level. We have continued to reduce staff, internal and external, thanks to the reduction in complexity. At the end of June 2022, internal staff is down 17% year-over-year and is now 524 employees. Recurring revenues, the measurement of the transformation progress, is up to 51% of total revenues. Overall, recurring revenues have increased 10% annually over the past 5 years. The European state development market offers significant opportunities for future profitable growth. With 9 out of 17 development banks now under contract, we are excellently positioned to win additional customers in the public banking space in Germany and Europe. We have long-term subscription contracts in place with opportunities for upselling. We have delivered this platform in 18 months only. The application is live with thousands of customers, and we are extending our service offering by hosting some of the state development banks in our data center in Germany. Recently, we have added another bank to the portfolio, the L-Bank, Landesförderbank Baden-Württemberg, the #2 in Germany. Thanks to its high level of standardization and modularity, the go-live for the L-Bank was done in only 3 months, which is key in a SaaS environment, where everything counts on shortening the time between the contract signature and the go-live. The state development banking market is growing because the amount and the number of subsidies and incentives is growing rapidly. In Germany only, there are more than 2,500 funding programs in place for companies, and all those programs have something in common. There are no gifts. Companies and individuals have to apply for grants, upload documents, ID themselves and so on. Our platform has been tailored to the digital needs of the state development banks and includes the European funding engine, which can be used by all European member states. Therefore, CREALOGIX is in the pole position, and we see that this new segment will become an important contributor to growth and profitability of the company. In short, we have not only delivered the state development bank program this past financial year '21/'22 but many others. Let me share with you some of the other customer successes. Let me share with you some of the other customer successes. In the Middle East, for example, we have delivered for the Saudi National Bank, which is the largest financial institution, a new digital front-end solution. We have also successfully launched in Middle East a lending platform solution which allows banks to fully digitally grant consumer loans directly in the retail stores. In Asia, we went live with the next release of our digital advisory solution with Bangkok Bank, which is the largest financial institution in Thailand. In the U.K., we have successfully deployed our new digital onboarding solution and helped Tilney to rebrand to Evelyn. In Germany and Switzerland, we have continued to modernize the installed base together with our customers and, for example, went live with the next generation of our digital banking platform at Bank Julius Baer. And the Raiffeisen Bank Südtirol went live with our wealth management solution. Beyond the recognition of our customers, we have also been recognized by various institutions for our innovations, our impact and our positioning in the digital banking space. For example, Forrester recognized CREALOGIX as a strong performer for digital wealth management platforms. The performance of the financial year '21/'22 was impacted by a number of onetime effects. The current financial year remains unaffected and will, in addition, benefit from gross margin improvement measures which we launched in the financial year '21/'22. Let me back the statement with 3 facts. First, the high investments in the Funding Portal of CHF 20 million have been 90% completed, and the remaining development costs are fully included in this year's budget. The overall R&D budget for the current financial year is back to normal levels and locked in at 20% of total revenues. Second, onetime service revenues were down almost CHF 7 million year-over-year, partly driven by lower demand, but also driven by the shortage of billable development and professional services staff which was assigned to the Funding Portal program. On average, 50 full-time employees from our billable workforce were deployed to the Funding Portal program. Those full-time employees have now been freed up for billable development and service work again. Third, in the financial year '21/'22, we have implemented a number of measures to improve gross margin, ranging from price increases, staff and cost reductions, increased nearshoring and shared services ratio, the shutdown of nonprofitable services and products and the sale of nonstrategic business. The majority of these measures will have its full impact in the current financial year, and all of the above will contribute to a significantly improved EBITDA and cash flows. And now I'm handing over to Daniel Bader, our CFO, with further details on the numbers.

Thank you, Oliver. Hello, everybody. Welcome also from my side. Now let me show you how we closed our books in the financial year '21/'22 in more details. As explained by Oliver, our revenue decreased by 14%, respectively, 12.5% in local currency. We recorded the largest decreases within nonrecurring revenue like service, goods and licenses. Therefore, the share of recurring revenue increased by 1 percentage point, up to 51.3% if compared to the previous year. Please be aware that we constantly amortize our goodwill position over 10 to 15 years. Therefore, we focus on EBITDA and adjusted net profit. Both KPIs do not include the goodwill amortization charge, which amounted to CHF 5 million in the past few years. This allows for a better comparison with other companies, which do not amortize the goodwill. Our EBITDA took a temporary dip due to the following 2 reasons: first, the R&D peak of 31% of total revenue; and secondly, the revenue reduction by 14%. These 2 negative drivers could only be partly compensated by efficiency gains, which resulted in lower staff and other costs. Depreciations, taxes and financial results were at comparable level to the previous year. Let us now have a closer look how our revenue categories developed in more details. Within recurring revenue, we had 2 drivers impacting the reduction. In the category SaaS hosting, the reduction mainly relates to service subscription packages, which decreased by 25%, respectively CHF 3 million, whereas the other SaaS hosting business, which includes SaaS subscriptions and hosting services, remained stable. We experienced less demand in selling subscription service packages and resource constraints as many service staff members were working on development tasks. Such packages include, for example, a fixed number of service days which customers order on a reoccurring basis every year. The second driver impacted our maintenance revenue, which is the result of our transformation to more SaaS revenue, but also due to the ongoing consolidation of our product portfolio, which includes setting end-of-life older software versions. We see nonrecurring revenue recorded a lower volume of services, minus 11%, since partner companies could take over implementation work for our solutions, especially for the Funding Portal solution in Germany. License sales also declined by 13% based on reduced demand in the banking software market. The revenue category others covers mainly the sale of devices such as payment slip scanners and is focused on the Swiss market. We saw here a reduced demand in the market as the go-live on 1st of October 2022 of the QR bills is now approaching soon. If you look at the development on a long-term basis, we can see a clear growth in the recurring revenue, more than 10% every year over the last 5 years. This was primarily driven by the SaaS and hosting business. This transformation towards SaaS, of course, was partly also at the expense of license revenue and attached to it, also maintenance revenue. From a geographical point of view, we saw a mixed development in '21/'22. Switzerland, except for the device business with stable revenue, Europe with growing SaaS volume, but overall reduced revenue and strong growth in the other regions. As already mentioned, our operational result took a temporary dip in the financial year '21/'22. Our R&D costs peaked at 31% of total revenue in the last financial year since we had to complete our Funding Portal solution for the development banks. Overall, we have now invested almost CHF 20 million over the last 2 years to build this Funding Portal solution. The delivery of the entire Funding Portal solution is 90% completed. The increased R&D costs and declined revenue could not be offset by efficiency gains. These cost reductions include lower costs for our staff, but also for our external partner companies. Especially for the development of the Funding Portal solution, we had many partner companies on board which are now phased out due to the completion of the program. On top of that, we have streamlined the organization by reducing the number of legal entities and locations. But as said, these savings could not compensate the temporary increase of the R&D costs and the decreased revenue. Therefore, EBITDA reported a minus CHF 9.3 million. The performance dip resulted also in a negative adjusted earnings per share of minus CHF 8.76 per share, which compares to CHF 0.61 in the previous year. Our shareholder base remained relatively stable with a free float of around 40%. For the financial year '21/'22, no dividend is proposed to the Annual General Meeting, which will take place on the 26th of October this year. Now let us come back to the financial statements and look at the development of the balance sheet. As per 30 June 2022, we reported a cash position of CHF 14 million. The decrease results from our investment peak in R&D and the final cost for our headquarter move in Switzerland in July 2021. Noncurrent assets of CHF 56.5 million mainly consist of goodwill of CHF 32 million and is constantly amortized by CHF 5 million per year. Our equity reduced by CHF 22 million in the last financial year. Main drivers were the temporary performance dip, but also the Swiss franc, which got unexpectedly stronger in the last days of June 2022 and negatively impacted the equity by CHF 5 million. These translation losses of CHF 5 million were directly recorded in the equity and did not impact the P&L. This led temporarily to an equity ratio of below 25% and, therefore, below the required level of the convertible bond. However, events after balance sheet date such as the sale of Swiss Learning Hub have mitigated this so that the bank agreed not taking any actions. Our reduction in cash can be better explained in the cash flow statement. The reduction of CHF 14 million is based on the negative cash flow or free cash flow of CHF 22 million for the full year. Our R&D peak had an impact on the operating cash flow but also on the investing cash flow since 2 modules for the Funding Portal solutions have been purchased from development partner companies and have been capitalized in the amount of CHF 4.5 million. The negative free cash flow has been financed by short-term financial liabilities. If we compare now the first half year to second half year of '21/'22, we can see an improvement in the free cash flow, which already allowed to repay financial liabilities in the second half year. The improvement is based on the cost-cutting measures, which will have their full impact on the current financial year. After process of more than 6 months, we closed on the 16th of August a transaction to sell 2/3 of our digital learning business, which mainly consists of the Zurich-based Swiss Learning Hub AG. The shares of 2/3 is sold to a Swiss group of investors centered around the private equity company, blue8. The remaining shares can be acquired in the future. Swiss Learning Hub offers digital learning products in the Swiss market and contributed to about 10% of total revenues and has around 50 employees. The purchase price was fully paid in cash at the closing date of the transaction and led to a gain in the operational result and cash in August 2022. Richard will now elaborate in more detail our strategic direction and the benefits of our Digital Hub.

CREALOGIX, with the CREALOGIX Digital Hub, has the most attractive solution for banks to prepare for their digital future. Before I start explaining why, I want to highlight what we did from a product strategy and technology strategy view in the last financial year. We continued to consolidate our product portfolio. We increased the number of customers which use Digital Hub technology. We delivered innovation with extensive developments of the Digital Hub front end, and we fortified the foundation of our own platform to facilitate client transitions to next-generation technology and to cover future customer needs. Now together with colleagues, Tom Roth, CTO; and Yannick Decaumont, VP Product, I want to show you in the next few minutes why CREALOGIX is at the technological forefront of the transformation which is happening right now in the financial industry. Thanks to transformational technologies, the power shifts from the bank to the customer. Banking used to be centered around the physical institutions. Now it's turned towards the end customers and their digital devices. Having more and more choice how, when and which financial services to consume means that you, as a customer, are being at the center. CREALOGIX is shaping and advancing this transformation for the benefit of our clients, the digital leaders within the financial industry. That is our purpose. As a result of this paradigm shift, we have a totally new situation driven by the digitalization of the industry. Customer needs are in the focus, and customer screen time represents the highest value. Financial brands need to fight for customer screen time. You can see it very nicely just here on the slide. All these customers use some kind of screens to access financial services, and that's where the fight for the customer takes place. And that place is in the front-end systems, exactly what the CREALOGIX Digital Hub covers. We are not the only ones convinced that the future of banking is in the front end and that the front end is at the top of the digitization agenda of the leading financial brands. If you look at the publications in the online and specialized press, there has been a big trend in this direction lately. Here are some excerpts from some of these articles and they all agree, the front end decides about customer loyalty. The front end decides about customer satisfaction. The front end decides about customer control. Let's first see what CREALOGIX offers from a technological perspective to create front-end leaders and then, from a functional perspective, what is needed to win the front-end game. The technological view will be given by Tom Roth, our CTO.

Now as part of our strategy, which Richard alluded to, where do we aspire to help our clients, our banks? Taking a simplified view on banking IT landscapes, there are 3 layers or types of systems in a typical bank. The first layer is the front-end layer for banks to interact and engage with clients. These are all channel solutions, so your mobile, your tablet, your web or your watch app for the banking end clients as well as the bank's advisers. The second layer is the functional layer. This is where banking business and IT services are provisioned in order to make them available to end clients in the front end. And the third layer is the back-end layer, which is for record keeping. It includes book of records for clients, positions and transactions. We at CREALOGIX focus on creating value for the bank and its customers on the first front-end layer as well as creating the platform or the frame to bring partner-, bank- and ecosystem-based products and services to the end client. These layers are what you see marked orange on your presentation. Now let me show you in slightly more detail how we do this. In the area of front-end and channel solutions, we focus on using industry standard technology frameworks and extending these with proprietary technologies in order to offer our clients the means to design and implement customer experience and UIs as rapidly and as easy as possible. These include, for example, accelerated tools to design, manage, govern UIs. In the functional layer, we provide proprietary functional modules called hub modules, which cover all the basic digital banking services which clients demand. This is also where our open platform architecture allows third-party fintech or bank-owned solutions to be placed in order to surface them via a single front end. The foundation and integration capabilities provide what is necessary and helpful to deploy a platform in the banking industry: security, audit capability, authentication, data persistence, front-end technology, et cetera. It also offers integration capabilities to the back-end book of records, which is usually provided by core banking solutions. In the past year, we have brought many industry-leading technologies to our platform. And in the coming quarters, we aim to increase the share of accelerators and capabilities which help our clients be even faster and more efficient in implementing and using our solution. We aim to increase single shift from private to public cloud deployments to provide ready-made integration end points and to focus more on bringing the right insights to the users instead of merely data. And now I'm delighted to hand over to Yannick, who will tell us more about the functional aspects of Digital Hub.

Thanks, Tom. How did we translate that functional perspective into winning the front-end game? As you heard from our CEO, with one-of-a-kind fintech offering we proudly call Digital Hub. What makes our product so special and ahead of the competition? Well, with Digital Hub, we are enabling our customers, banks and financial institutions to serve all segments with one product, empowering banks to create the necessary stickiness to retain and yield better on their end customers, maturing from affluent into high net worth individual, for example. How do we achieve this and support revenue generation? By delivering an above-the-market benchmark product. As you can see from the presented slide, our focus in the past financial year was the neo banking space. Our UX-led product design and state-of-the-art front-end work positioned us as a leading solution for the neo apps in Europe. Let's look a bit closer at the details. Here, you can see our solution catalog for our Digital Hub Neoapp and the set of functionalities that make it unique and the leading product in the market. Our platform provides a powerful foundation that acts as a technology base to power a set of out-of-the-box solutions, while our product strategy focusing on UX excellence allows us to gain new business by providing smooth and customizable front end. Digital Hub is the perfect platform to scale up our customer base and establish the company as a product house, paving the way to more SaaS opportunities. I will now leave you with a look at our Neoapp. Hope you enjoy it, and I very much look forward to presenting to you the next solutions we are building in the Digital Hub in next year's call. Thank you. [Presentation]

Many thanks, Yannick. Very impressive demo, showing how pleasant and simple a well-done financial application app can be. And the even bigger thing is that our existing clients, they do not have to engage on a high-risk journey to enter into this front end-oriented world, which is so attractive for the customers. With the Digital Hub, they can accelerate their digital strategy while keeping risk exposure low. Why is this? Because the Digital Hub combines the essence of digital leadership with the pillars of a robust technical foundation based on years of digital banking experience. This means that CREALOGIX clients can attack in the digital space, while at the same time, they do not neglect their defense, which means to maintain the reliability of their existing digital services. Since improvements of the digital front end are highly visible and highly sensitive, it is of utmost importance to do the urgently needed transitions to new digital platforms as smoothly as possible. And this is what CREALOGIX can promise. Why is the Digital Hub approach so attractive for financial institutions? Our customers want to get ahead with their digital transformation without obstacles but with having many choices. Digital Hub allows financial brands a quick transition to digital leadership with their individual mix-and-match transition path. This means that our clients get the benefits of a greenfield approach without taking the huge transition risks that normally come with such an approach. They can accelerate change and innovation, move to the next-level digital platform. But at the same time, they can rely on reliable existing technology. This allows them to strongly reduce complexity and cost. Another big winning point is that there is no interruption of innovation during the transition to a next-generation front end. Why? Because new features can still be implemented in the existing system using new technology and then transferred to the new platform with a minimum of cost and with no changes in the back end. It's what banks need in this challenging time. They can cherish the new while leveraging the existing and keeping risks low. Now I will hand over to Oliver for the outlook.

Thank you, Richard. Let me now present to you the outlook. The first 2 months of the new financial year '22/'23 were marked by a continuing focus on the digital banking business. The sale of 2/3 of the subsidiary, Swiss Learning Hub, was announced in August 2022. The difficult financial year '21/'22 was characterized by a series of one-off effects, in particular, high capital investments for the development banks. Capacities which were tied up for development and implementation are now once again available for important customer projects and initiatives. The greatly improved cost situation will take us back to profitability. At an adjusted comparison level, including the deconsolidation of the Swiss Learning Hub, we do not yet expect higher sales for the financial year '22/'23, in particular, because of the uncertainties with the euro exchange rate and the continuing switch to multiyear contracts. On the other hand, we do expect to return to a positive EBITDA in the first half year of the financial year '22/'23 already.