Crealogix Holding AG (CLXN) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the analyst call for the half year results 2022, '23 for the CREALOGIX Group. I would just remind you, again, if you could mute your microphone if you haven't done so already. I am your host, Zoe Mitchell. Mr. Oliver Weber, CEO; and Mr. Daniel Bader, CFO of the CREALOGIX Group, will present the annual results to you. All of the results will be presented before taking questions. I'll just remind you again to mute your mics during the presentation so that everybody can hear the information. The session will be recorded and available on the website after this call. So if you have any questions or queries, you can check the information there. For the best viewing experience, please click on the 3 dots in the presentation window of Teams where it says more and select fit to frame. This will ensure you are seeing the full stage. And now I would like to hand over to Mr. Weber for the presentation.

Good morning, and welcome. Thank you for joining and your interest in CREALOGIX. Our performance in the first half of the financial year '22/'23 developed this plant beside a challenging economic environment, which of course, impacted investments of banks into digital banking. We have diligently executed our plans, focusing on improving our profitability through a further consolidation of our portfolio while completing a very important investment into a new segment, the European funding market. Therefore, so far, we're on track with the execution of our plans, but we are also foreseeing further profitability measures, which will positively impact the next reporting periods. Now let's take a look at the key figures for the first half of the financial year '22/'23. Revenues are slightly up by 1% year-on-year in Swiss francs and amount up to CHF 42.3 million. Last year, on an adjusted comparative level, the number was CHF 41.8 million. The weak euro had an impact on the growth reported in Swiss francs as the year-on-year growth in local currencies is 6.8%. While revenue growth was negatively impacted by the Euro-Swiss franc conversion rate, we benefited as well in terms of profitability, thanks to our purchasing volumes in euro. Recurring revenue is reported at 48.9% of total revenues. That is 8.4% or CHF 1.9 million below previous year, which is mainly attributed to a slight reduction in maintenance revenues and subscriptions for services. At the same time, we have closed various deals with onetime licenses, leading to an increase in nonrecurring revenues by 12.5% or CHF 2.4 million year-on-year. EBITDA is reported at CHF 8.5 million. That's a year-on-year improvement of CHF 12.7 million. EBITDA reported today has been adjusted with a positive impact compared to the announcement of the preliminary numbers this past January. The reason is that we have, during the course of finalizing the closing of the half year numbers, decided to completely deconsolidate the digital learning business. Our CFO, Daniel Bader, will provide you with more details later in this presentation with respect to this transaction. The reported EBITDA of CHF 8.5 million contains CHF 7.5 million gain from the sale of the Digital Learning business. Therefore, our operational performance improved by CHF 4.8 million to CHF 1 million year-on-year. Besides this positive impact from the sale of the Digital Learning business, we have, therefore, improved the operating performance, taking into consideration that we still had to bear, as announced previously, onetime investments of roughly CHF 3 million for the completion of the development for the funding platform in the first half year of the financial year '22/'23. Let me share with you some of the highlights of the first half of the financial year. First, we had communicated to the market that the improvement of the financial performance would be our utmost priority for this financial year without compromising the fundamentals of our strategy, and it remains our top priority for the remainder of the year. One of our strategic imperatives is to penetrate new banking segments with high growth potentials, which can be leveraged with our capabilities. Therefore, we had invested more than CHF 22 million into the new SaaS platform for the European funding market, and it is already today a successful investment. I would even say that we have managed to become the leading player in this market in a relatively short time, and this business will become an important part of CREALOGIX digital banking business in the future. On the flip side, the investments made were high and have caused a number of challenges for the company. Therefore, in the first 6 months of this financial year, we've been very focused on achieving our set goals, which I summarized the 3 main topic. First topic, to deliver the funding platform by completing the development by the end of calendar year 2022, and we did that. Currently, 5 of the 8 remaining banks are migrating onto the platform, and we've recently signed an important multiyear contract for further extension of the platform. Second topic, to deliver our efficiency program, including price increases, turning around loss-making projects, align capacity to our offering and reduce cost across the board through efficiency gains and to leverage our global delivery and shared services center. And last not least, to continue the consolidation of our portfolio through the sale of nonstrategic businesses, and we did that as well. However, we are not yet done with trimming the company to profitability and to bring it back on a growth track. Further measures and initiatives are in execution. And the third topic, to deliver value to our existing customers with the freed-up resources, which have been charged with the development of the funding SaaS platform previously. As a matter of fact, we have a substantial pipeline of work, which has been accumulating over the past 2 years, and the majority of our crew was focused on delivering the new funding platform. Therefore, I have full confidence that we will see a positive development of the business, both in the new segment funding as well in our existing digital banking business. Now let me share with you why we at CREALOGIX are super excited to be a key player in the space of public banking. We made entry into the public banking space by winning a 10-year SaaS platform deal with originally 6 development banks. And for the context, development banks are specialized multipurpose financial institutions. Each of the Bundesländer in Germany, that means the states, have established such a bank. And there are 250 more in Europe. Thanks to its modularity and flexibility, this platform can be extended with little effort and can serve as the central hub for digitalization of public services processes. And we are just at the beginning of launching this platform, which was designed and developed to accommodate digital application journeys. With a banking technology graded tooling and processes, our platform can be helpful whenever today's analog or semi digital application procedure want to go fully digital. The use of the platform is not limited to public finance. It is a platform for broader use also in adjacent industries such as InsurTech. With that platform, we are very well positioned for future growth. I want to highlight 3 drivers. First driver, providing public services digitally. It's the law, and our platform complies. Digital services have been rated as a driver for growth and modernization. Therefore, a law passed in 2017 with a target for completion end of 2022, the German Onlinezugangsgesetz, in English, the online access, provides that all public services must be offered digitally. And we are in 2023, and there are delays in executing this act. That's why we believe that CREALOGIX can play a major role since the platform is so flexible through its modularity. It can be used by a wide number of public players to comply with that law, be it development banks, ministries, federal offices, communities, public services companies and so on. The second driver, with the funding platform, we believe to be in the right time at the right place. There's a renaissance of global funding initiatives. And there are thousands of funding programs, and they are all potential candidates for digitalization with our platform because the platform is available, simple to install and inexpensive to operate. And the third driver, growth in the public finance market is driven by references and customer promotions. The market entry barriers are fairly steep. But once successful, contenders can take part in public tenders, and we believe that we have a very good chance to win. While the public finance sector is currently, as a pure SaaS offering, only accounting for roughly 15% of our business, but growing, our digital banking business has developed in line with our expectations. Penetrating the new segment public finance was very challenging for the company in terms of investments and focus over the past 2 years. However, we are now back on focusing also on all parts of our business. As a summary, in the Middle East, we are excellently positioned in KSA and have launched several initiatives to grow outside this key market. We have invested into the modernization of the current offering and in the sales force. In parallel, we've introduced a new product, the lending origination hub, a lending platform solution for end customers in the retail environment. It allows short-term financing and consumer financing fully digital at the checkout. With that solution, we have recently won a number of customers in this region. We expect to further grow in the Middle East and to further expand our market position. In Germany, we have introduced an upgrade for our financial portal solution with new business functionality, security features and further enhancements, which will be deployed over the next 12 months. Furthermore, our hosting services business in our data center in Coburg is growing, thanks not only to the funding business. In Switzerland, we are in the process of campaigning our well-established digital banking product in the retail banking space for Tier 2 and Tier 3 banks, which are planning to modernize their front end in order to catch up with the competition. And in APAC, we have ongoing projects with our existing customers, and we are using those reference cases to further develop our position in this market. So we have traction and focus in the new segment and the existing business. And while banks remain cautious with respect to larger investments in the digital banking, we see demand for gradual modernization and enhancement of current solutions. We also observed that banks which have decided to in-source the development of digital banking, starting to realize that there is, in the long run, a high price to pay for building up all capabilities in-house to do that. We believe that a combination between our offering and the banks will be a very good fit. We are offering, for instance, most of our products as headless. That means we provide the foundation of the digital banking connected securely to various back ends, and the bank can build with their own teams the front end, either with their own tools or tools provided by CREALOGIX. Now I would like to hand over to Daniel Bader, our CFO, who will provide you with a detailed view on the financial results of the first half of the financial year '22/'23.

Thank you, Oliver. Good morning. Also welcome from my side. Now let me show you our key figures for the first half year '22/'23 in more details. Revenue reported at CHF 42.3 million, which is a growth of 1% in Swiss francs, respectively, 7% in local currencies. The previous half year revenue has been adjusted due to the sale of Swiss Learning Hub AG in order to have comparable numbers. Looking closer at revenue, the recurring revenue declined by 8%, whereas nonrecurring revenue increased by 13%. The 8% decline in the recurring revenue is primarily driven by negative FX impact. In local currency, the decline was 3% and the lower level of service subscription bookings. SaaS subscriptions, hosting and the maintenance business increased all in local currencies if compared to the previous first half year. We see nonrecurring revenue, service and goods business reported at a lower level whereas the bookings of licenses increased by CHF 3.7 million, respectively, 130%. This increase in licenses led to a reduction of the share of recurring revenue from 54% in the previous year, down to 49%. This has also to be seen in relation to our focus on profitability. From a regional point of view, we had more demand in our home market in Switzerland despite the lower goods business, whereas the share in Europe slightly declined, which relates to the efforts for the completion of the funding portal solution in Germany. EBITDA reported at CHF 8.5 million, which is an increase of CHF 12.3 million if compared to the previous half year. As you have heard from Oliver, the operating EBITDA amounted to CHF 1 million, which is a significant step-up of CHF 5 million from minus CHF 3.8 million to a positive CHF 1 million operating EBITDA. On top comes the onetime gain of CHF 7.5 million from the sale of Swiss Learning Hub AG. You might remember that we have sold 67% of the shares of Swiss Learning Hub AG to a Swiss investor group in August 2022. Instead of 67%, we have now 100% the concentrated Swiss Learning Hub AG, which has positively changed our P&L if compared to our provisional media release from the 24th of January, 2023. The option to transfer the remaining share of 33% is fixed at an amount of CHF 2.5 million and is reported in the balance sheet in the position long-term financial assets. Adjusted net profit, which excludes the goodwill amortization, reported at CHF 6.1 million comparing to a negative CHF 7.7 million in the previous first half year. But also bottom line, which includes now goodwill amortization, amounted to CHF 4 million, which is an improvement of CHF 40 million versus the previous half year. Looking closer at our operational result, we see an improvement from negative CHF 3.8 million to positive CHF 8.5 million. This significant improvement is based on 4 drivers. First, onetime gain from the sale of Swiss Learning Hub AG. Second, R&D onetime expenses reduced significantly due to the completion of the funding portal solution, which phased out in the first half year '22/'23. Third, the increased revenue had its positive impact on the EBITDA. And last but not least, our cost measures initiated in the previous year had its positive impact on the operational result. Now let us look at the balance sheet. Balance sheet total reduced by CHF 10 million due to the deconsolidation of Swiss Learning Hub AG. As a reminder, goodwill is constantly amortized over 5 to 15 years, which is a burden of around CHF 4.5 million every year. Also, R&D expenses are fully expensed in the P&L if not completely purchased as a module or a feature from a third party. The positive net result of CHF 4 million and reduced balance sheet total significantly increased the equity ratio up to 29% as per 31st December, 2022. The cash reduction of CHF 3.9 million can be now seen in the cash flow statement. Operating cash flow improved by CHF 2.7 million, but still at negative CHF 6 million. This relates to CHF 3 million spending for the completion of the funding portal solution and includes the impact from our business model. The majority of the subscription and maintenance invoices are based on calendar year and are therefore due in January. Thereby, only a small part can be collected before the due date. Historically, operating cash flow was always higher in the second half year due to this cash collection of the annual bills in January and February. Investing cash flow includes a net cash inflow, the sale of Swiss Learning Hub minus CapEx. Please remember that the remaining cash in of the 33% share at Swiss Learning Hub AG will be cashed in either toward end of this year or next year. Free cash flow, adding up to [ CHF 2 million ], reported at minus CHF 2.8 million, which is an improvement of almost CHF 13 million if compared to the previous year. The financing cash flow includes repayments of bank loans of CHF 1 million, which will continue in the current calendar year. All in all, this improvement is the first step, but further progress is necessary and also remains our top priority since the refinancing of our converting bond, which matures in November 2024, is approaching soon. Handing back to Oliver, who will conclude our call with his final remarks.

Thank you, Daniel. And before closing the presentation with the outlook, I'd like to thank Daniel for being our Chief Financial Officer for the past 3 years. Daniel was a key contributor in the transformation of CREALOGIX. He will be leaving CREALOGIX by the end of this month, as previously announced. Over the past weeks, Daniel has worked with Christophe Biollaz, handing over the job. Christophe joined us in February 2023, and I'm very excited to welcome him on board. I would like to take the opportunity to have Christophe briefly introduce himself to you.

Good morning, ladies and gentlemen, and thank you, Oliver, for the warm welcome. I'm very excited and thrilled to be joining CREALOGIX and become part of this great team. Prior to be joining CREALOGIX, I have been for the past 25 years in the CFO role for multinational stock-listed groups across many different industries in Switzerland, Austria, Japan and Australia. I'm Swiss, married, and father of 2 sons. When I joined CREALOGIX 4 weeks ago, I found a fully motivated team ready to start the next chapter. I met great talents fully dedicated to the company and its customers. They are the core of CREALOGIX long and broad experience and future promise for innovative, solid digital banking solutions. As we just presented, we made the first right steps to improve our financial results. We shall continue that path to further strengthen our profitability. Furthermore, new growth areas such as the funding portal with market-validated backing are on the table. Clearly, the current times are challenging, and we shall have to make further progress in improving the results. At the same time, the digital banking space provides for promising opportunities to us. I shall start as a CFO tomorrow, and I'm very excited to be able to contribute to the next chapter and look forward to seeing you all, latest in September for the presentation of the full year results. Thank you.

Thank you, Christophe. And now let me continue with the guidance. Improving the profitability remains our #1 priority. The completion of the onetime investment into the development of the funding platform in 2022 will have a positive effect on the bottom line in the second half of the financial year. Furthermore, other measures to reduce costs are still in effect as well as the continued consolidation of our portfolio. We expect for the full year a further improved operational EBITDA. In terms of sales for the financial year '22/'23, we do expect a slightly lower revenue at an adjusted comparison level, that means with the deconsolidation of the Swiss Learning Hub. And that is driven by the current uncertainty in the financial industry. Thank you very much, and back to the moderator.

Thank you, Oliver. This is the end of the presentation. Mr. Weber and Mr. Bader will now take your questions. If you wish to ask a question, raise your hand using the hand raise button in teams. You can switch on your camera or simply unmute yourself to ask a question. Unfortunately, if you have joined us by a landline, it's not possible to ask questions. However, you can reach out to our Investor Relations team after this call, and they will be happy to answer any questions you may have. So now if I could ask for the first question.

Mr. Muller, please?

Yes. I have a couple. You had a strong license sales growth. There are also Förderbanking deals in there as term licensees. I thought that's more a SaaS-related business, Förderbank. And that's the first question. Then probably I add then the next questions.

Okay. To answer your question, there -- the Förderbank platform and our commercial model for the Förderbank platform is purely a SaaS model, and that will remain the case. So the license sales are -- basically have been affected in our, I would say, digital -- other digital banking business.

Okay. And what was that? I mean, more or less, you mentioned the Middle East and so forth. Was that these type of businesses?

Yes, it was basically across the board. We have also seen license sales in Germany. And we have always been very open also with our customers that they have the choice to either go on a multiyear engagement or to acquire a license with respective maintenance fees. And in this year, we have, of course, been very open also to sell licenses.

Okay. Then in the guidance, or you had like a 6.8% adjusted sales growth in the first half. But for the year, you guide for adjusted lower revenues. What will happen in the second half? Because either I misunderstand the adjustment here? Or why is it that slowing down?

Yes. So we had, indeed, in local currencies, we had a solid first half year in Swiss franc is what it was a growth of 1% after the deconsolidation. We are prudent when we look into the remainder of the year, Whenever we see -- yes, I wouldn't call it a banking crisis, but at least some nervousness in the banking market. We also are impacted because the investment decisions are always depending very much on the nervousness and the confidence in the banking industry. And therefore, we are, for this context here, prudent. Of course, we have our plans. We have our pipelines, we have the deals we are working on. But we also don't want to overpromise and not be able to fulfill those expectations because the market is slowing down, our customers are careful.

The last question for the moment, how much down you anticipate the cost base in the second half relative to the first half? Is that this CHF 3 million you mentioned as an extra in the first half for Förderbank platform?

Yes. So we had this extra investment on the, I would say, on the tail end of this long investment into the Förderbank, and we communicated to the market there's another CHF 3 million to be invested in the first half. The development has been completed by the end of the calendar year. So therefore, we expect an improved EBITDA. But of course, we are also continuing our cost measures and others. And therefore, we have also expressed that we will be reporting a better or an improved operational EBITDA in the second half year. Thank you, Mr. Muller.

Does anyone have any further questions? Yes, Mr. Muller?

Yes, back again. You had the underlying CapEx of about CHF 4 million in the first half. Is there a potential to reduce further?

Daniel, you want to?

Yes. As you have seen in the financial report, investing cash flow was positive CHF 3.6 million. But CapEx, that includes, of course, the [ shared ] gain from the sale of Swiss Learning Hub, which amounted to CHF 4.5 million cash inflow. But the CapEx itself was only CHF 1 million. And that, of course, is further -- will be further reduced in the second half year.

Then what was the positive impact on the net profit level from the Digital Learning Hub? Was that CHF 7.5 million completely going through, following through?

Exactly, yes. Maybe you have read in the media release, we fully deconsolidated Swiss Learning Hub despite only 33% of the shares. We came to the conclusion that we do not have any significant influence over this entity anymore. So we cannot decide and so on. That's why we fully deconsolidated. And the remaining 33% shares are now reported in the balance sheet as a long-term receivable within the position, long-term financial assets.

And that's completely tax-free then, that's a capital gain?

Yes. Yes.

Okay. Then last question. The additional long-term development contract with the development banks. What does that mean exactly? And what areas are you here further developing? And what does it mean also financially?

That's an important extension of the existing modules. When we talk about Förderbank and the current platform, we estimate that roughly 20% of the possibilities in digitalization of those applications or the grant applications have been already realized in the platform, but there are still ways to go. And we have, of course, after now being at the end of this program, consolidated the requirements, the further requirements from the Förderbank cooperation with this group of 8 banks and have presented a plan how to realize and when to realize those further enhancements, and it's a paid contract. It's also being included in the SaaS. So it's increasing our SaaS fees accordingly. And on every annual basis or every year, we will be increasing those further developments. And it's an 8-year contract for the remainder of the time, and we expect this to continue over time. So there's going to be upsell every year in the Förderbank context because the requirements are increasing because there's regulatory changes, and that's basically only for the 8 banks that will positively impact the business. And if I look back into when we started this Förderbank program, we announced a number of this 10-year contract of CHF 36 million in total contract value. And if I look at the current numbers, we are 60% above that after only being 2 years in the program.

Okay. So this CHF 36 million is basically the 20% of the possibilities, and that's going up. How much of this -- how much this 20% is trending upwards, say, in the next 5 years, going up to, say, 40% of the possibilities or...