Crealogix Holding AG (CLXN) Earnings Call Transcript & Summary

Welcome to the analyst call of the half year results 2022-'23 for the CREALOGIX Group. I am your host of this call and Mr. Oliver Weber, CEO; and Mr. Christophe Biollaz, CFO of the CREALOGIX Group, will present the annual results. All of the annual results are presented before taking questions. The session is being recorded and will be available on our website. For the best viewing experience, please click on the 3 dots in the presentation window and select fit to frame. This will ensure you are seeing the full stage. I would now hand over to Mr. Weber to present the results.

Good morning, and welcome. Thank you for joining and your interest in CREALOGIX. My key messages for the financial year '22-'23 are: CREALOGIX has significantly improved the profitability year-over-year because we have pursued our utmost goal to improve the bottom line. We can also proudly report that we have completed and closed the largest software development program in the history of the company, the Funding Portal. All 7 state development banks, contracting parties of the original 10-year SaaS contracts are now live, and the platform is a great success in the public finance market and of course, also CREALOGIX. And while trimming the company to profitability, we have not stopped innovating together with our customers, which results in a refined product strategy and an offering tailored to the trends in the market. In brief, we have achieved a solid foundation for further profitability improvements, and we are ready to get back into a phase of organic growth. Therefore, the performance of the financial year '22-'23 was in line with our expectations for a significantly improved profitability year-over-year. On the other hand, we have continued to execute our strategy to consolidate our product portfolio in order to focus on banking. We have successfully divested the Swiss Learning Hub while expanding into new segments such as public finance and to modernize our digital banking products. The growth in revenue has been impacted by the challenging economic environment, which has slowed down investment of banks into digital banking as well as the strong Swiss franc. Now, let's take a look at some of the key figures for the full financial year '22-'23. Revenues are at CHF 81.4 million. Previous year revenues were at CHF 94 million. The year-over-year change of CHF 12.6 million is attributed to the divestment of the Swiss Learning Hub, which accounts with CHF 7.3 million, and the strong Swiss franc, which accounts for CHF 2.8 million. Thus, a total of CHF 10.1 million of the change is attributed to those 2 effects. The remaining net reduction of revenues of CHF 2.5 million or 2.8% is mainly driven by a reduction of service subscriptions. And those service subscriptions are recurring annual professional services contracts whereby the amount of services ordered can vary year-over-year based on the life cycle of the digital transformation project. We've also noticed that banks had slowed down their budgeted IT spend in the beginning of the financial year '22-'23 as a reaction to uncertainties in the market. However, our pure SaaS revenue remained stable. And on the other hand, orders for upgrades and new licenses are up, which demonstrates that our previous investments in modernizing and innovating our digital banking products are generating the expected demand and thus, returns. EBITDA is reported at CHF 8.9 million, a year-over-year total improvement of CHF 18.2 million. Without the gains of the sale of the Swiss Learning Hub, the operating EBITDA reached CHF 1.4 million, a year-over-year net improvement of CHF 10.7 million. Net result of the period is CHF 4.5 million, adjusted by goodwill amortization and is a year-over-year improvement of CHF 16.6 million. In the financial year '22-'23, we have also reached 3 important milestones on our strategic road map. First, we've changed our organization from a global setup into customer-centric market units in order to better respond to the different requirements and the digitalization speeds of the various markets we're operating in. Market units have full functional control for strategy execution, their go-to-market, and the operational delivery. They are supported by group functions to leverage our capabilities across market units and we have been able to achieve increased traction with our existing customers and to generate a number of very promising opportunities. At the same time, we have been able to bundle capabilities and to reduce costs in overhead functions. Second, we have leveled our cost base, thus leading to significant gross margin improvements driven by cost reductions and the completion of several software development programs, especially the Funding Portal. We have delivered our efficiency program, including price increases, turning around loss-making projects, align capacity to our offering, reduce cost across the board through efficiency gains and leverage our global delivery and shared services center, and last but not least, continue the consolidation of our portfolio through the sale of nonstrategic business. We have now an optimized cost structure on a well-balanced level, a sound foundation for profitability and future growth. Third, we have refined our product strategy, and we have updated our offering. We are now focusing on 3 banking product areas for growth, where we see the biggest potential for profitable growth in the future. First, the Funding Portal, the leading modern platform for state development banks, which is well established in the German market and ready to be rolled out into other European markets. Second, we are innovating our business banking platform together with one of our strategic customers and believe that based on extensive market research conducted, business banking offers significant potential, especially in the German market, but also internationally. And third, we have and we will continue to modernize our digital banking products, the so-called flagship products, which are very well established in the various markets. Together with our existing customers, we have developed a tailor offering for other retail and private banks, as well as for wealth management firms. The focused offering is already showing very positive results across all markets, whereby Germany and Switzerland remain the biggest markets in our portfolio, followed by the increasing business share in the Middle East. Our business in Asia has been stabilized, and we have taken appropriate measures to cope with the weaker U.K. market. The consolidation of our product portfolio has allowed us to respond better and faster to the requirements of our high revenue-generating customers. In the financial year '22-'23, we were able to increase revenues by customers by 9%, a continuously positive trend. Moreover, revenues generated by employee is up by 20%, supporting the shift of our talent towards customer groups with the highest backlogs and thus the highest utilization. In short, the overall reduction of overhead and the efficiency gains in support functions also contributed positively to the results. Switzerland is the home market of CREALOGIX. In this past financial year, we have successfully realigned with our customers with respect to our renewed offering and a refreshed go-to-market. We are delivering innovation to our customers with first-mover technology such as instant payments with a flexible new banking and a seamlessly integrated AI functionality. Innovation to our flagship product, digital banking is now delivered in a new product framework with a modified release policy under a new recurring license regime, which includes ongoing customer's product enhancements. Response from the market is positive. We have been able to book multiyear contracts and strategic engagements as well as major customer wins. The single biggest accomplishment in operational execution in the financial year '22-'23 has been the successful completion of the biggest software development program in the history of CREALOGIX, the Funding Portal for state development banks. We are very excited to be now one of the leading players in the space of public finance. We made entry into the public finance space only 3 years ago by winning a 10-year SaaS platform deal with originally 6 development banks. Today, 8 state development banks are already our customers. That means we serve half of the German Bundeslander. And we are just at the beginning of selling this platform outside Germany, which was designed and developed to accommodate digital application journeys. While banking technology created tools and processes a part of the platform, this platform can be helpful whenever today's analog or semi-digital application procedures want to go fully digital. I would say, looking at the map that we have managed to become a 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 based on the growth potentials in the public finance space, be it in Europe or globally. In the Middle East, we are excellently positioned in the Kingdom of Saudi Arabia, and we have launched several initiatives to grow outside this key market. We've invested into the modernization of our current offering, and we expect to further grow in the Middle East and to further expand our market position based on the successes we had with leading financial institution, such as, for example, the Saudi National Bank, which is the largest commercial bank in Saudi Arabia. The market has become very dynamic and fast-moving with respect to digital banking. Regulatory changes and the ambitious agenda Vision 2030 are driving demand as well as technological developments, such as AI and machine learning as well as hyper personalization. The market is very responsive for new digital banking solution. As an example, we have introduced a new product, the Lending Origination Hub, a lending platform solution for end customers in the retail environment. It allows short-term financing on consumer financing fully digital at the checkout. Within only 12 months, we've already won 5 new customers, and that is a great success. Last but not least, we have published on a voluntary basis, our first ESG report because CREALOGIX is committed to sustainability. We consider ESG to be a strategic enabler for future successes. ESG represents the framework and designs the path to sustainability. ESG is also bridging measurable requirements for a sustainable business between our customers, the financial industry, and CREALOGIX. With its first ESG report, CREALOGIX is expressing its ambition to comply with the 3 dimension of sustainability. Now, I would like to hand over to Christophe Biollaz, our CFO, who will provide you with a detailed view on the financials of the financial year '22-'23.

Thank you, Oliver. Good morning, ladies and gentlemen, and a warm welcome also from my side. During the '22-'23 financial year, CREALOGIX was able to make significant progress in improving its financial health and stability. Despite the reduction in sales, CREALOGIX was able to substantially improve its EBITDA, net result, cash flows, equity ratio, and earnings per share, while stabilizing the equity and net debts. Overall, a good and further step in the right direction. Now let me run you through the specifics of our results. Overall, sales were strongly impacted by the divestment of the nonstrategic Swiss Learning Hub activities back in August '22, as well as by the ongoing appreciation of the Swiss franc against the euro. The 2 factors combined account for CHF 10.1 million sales reduction relative to the overall reduction of CHF 12.6 million. The residual organic decline accounts for a reduction of CHF 2.5 million or a minus of 2.8% in the year. When looking at the evolution of sales per category, the combined effects of the Swiss Learning Hub divestment and foreign exchange is particularly strong within the recurring revenue category. It explains about 2/3 of year-on-year revenue reduction of CHF 0.4 million. The remaining decline of some CHF 3 million in recurring revenue is driven by a reduction in hosting subscriptions. The SaaS revenue remained stable during the period. The recurring revenue share reaches 48% in 2023. The nonrecurring revenue increased by CHF 0.8 million year-on-year driven by stronger license sales. The combined regional sales of Switzerland, Europe reaches a share of 76% in '22-'23 and remained stable. Pipeline sales, CREALOGIX was able to improve the operating EBITDA by CHF 10.7 million. After a negative EBITDA in '21-'22, CREALOGIX achieved a positive operating EBITDA of CHF 1.4 million with an EBITDA margin of 1.7%. Adding the one-off Swiss Learning Hub divest gain of CHF 7.5 million, CREALOGIX achieved an EBITDA of CHF 8.9 million for the year, thus providing for a significant year-on-year increase of CHF 18.2 million. CREALOGIX is able to report a minor net result of CHF 29,000, yielding a year-on-year improvement of the net result of CHF 16.9 million year-on-year driven by the EBITDA improvements presented in the previous slide. CREALOGIX elected to capitalize and amortize its goodwill over a period of 5 years to 15 years. When excluding the annual goodwill amortization of CHF 4.5 million and including the Swiss Learning Hub divest gain, the adjusted net result reaches CHF 4.5 million in '22-'23. In summary, despite the decline in sales, predominantly driven by divestment and foreign exchange effects, the CREALOGIX net result is back to positive in '22-'23. Both EBITDA and net result improved significantly year-on-year. CREALOGIX was also able to improve its free cash flow by CHF 19.9 million during the reporting period. While half year one of '22-'23 saw a negative operating cash flow of CHF 6.3 million, half year 2 delivered a positive operating cash flow of CHF 0.8 million. The drivers for the increase of the free cash flow are a combination of improved operating cash flow, a reduction in CapEx as well as the one-off proceeds from the divestment of the Swiss Learning Hub, with a combined positive effect of CHF 19.9 million year-on-year. The free cash flow in half year 2 was positive and reached CHF 0.4 million. Hence, the full-year negative free cash flow resulted from a negative free cash flow in the first half year 2023. The cash flow from financing is driven by tactical repayment of revolving credit lines, amortization of COVID loans, and the grant of a subordinated shareholder loan. CREALOGIX was able to strengthen its balance sheet during 2022-'23. The cash on hand reduction as of June 30, 2023, was targeted to facilitate a balance sheet contraction. Cash positions plus unused lending credit facility of CHF 8.3 million amount to CHF 11.7 million as of June 30, 2023. At the same time, 1 year before, there were no unused credit facility. That is, all facilities were fully used back in June 2022. Subsequently to the closing in June 2023, CREALOGIX continued to finance daily operations through the unused credit facility. Net debts are slightly up, whereas the equity is stable and the equity ratio was improved by 610 basis points year-on-year. CREALOGIX is currently evaluating all options to refinance the existing outstanding CHF 24.1 million convertible bond due in November 2024. The adjusted earnings per share, which is calculated before goodwill amortization was increased to CHF 3.22 per share. The free float remained at 40%. No dividend is proposed for full-year '22-'23, so as to further strengthen an equity ratio going forward. Overall, CREALOGIX was able to improve well its financial results. CREALOGIX made another step into the right direction. I would like to thank our staff for their hard work and dedication. Without them, this result would not have been possible. And I also would like to thank our customers, partners, and stakeholders for their continued support to the company. Thank you, and over to you, Oliver.

Thank you, Christophe. Before I move on to the guidance for the financial year '23-'24, I would like to summarize the baseline. In the financial year '22-'23, we have achieved a solid foundation for further profitability improvements and to get back into a phase of growth. We have absorbed the high investments into various product development, especially in the Funding Portal. And since we are not capitalizing our own software development, we will have no further impacts in our P&L from those past developments. We've significantly reduced our cost run rate and improved the quality of our revenues. The consolidation of our vast product portfolio allows us to focus on high-growth and high-profitability engagements. The organization is customer and market-centric and our updated product and services offering has been very well received by the market. Therefore, we are seeing a positive trend for our business, and we are convinced to be excellently positioned in the market. When we analyze responses from recent studies in the financial industry asking which are the most important features of digital banking, we recognize that CREALOGIX is addressing some of the most relevant features with its current offering, such as state-of-the-art online and mobile banking as well as omnichannel banking. This is another important indicator and market feedback that CREALOGIX is addressing the market demand with the defined key initiatives. We have reshaped our products' strategy and renewed the growth story through 3 key initiatives: first, in the last 2 years, CREALOGIX has established itself as a market leader in Germany's development banking sector. The company builds on this excellent starting point to accelerate the business in Germany and to enter the European market for public finance. This is a sector which lags behind in digitalization and thus provides an exceptional growth prospect. Furthermore, we are planning to expand our offering to public institutions in Germany like ministries or other offices distributing fundings, and we currently attract a lot of attention by new stakeholders in the market. Moreover, the European funding market with its more than 200 state development banks offers excellent growth opportunities for the future. Secondly, digital banking for SMEs is one of the underdeveloped areas in the overall digital banking market, and therefore, a prime growth opportunity for us. With one of our long-standing clients, we have established an innovation partnership to develop the next-generation platform solution for the sector and to sell it internationally. The new business banking product is a long-term project, and we will continuously onboard new customers while developing it. In the context of the client-centric approach in all markets, CREALOGIX is further investing in attractive upgrades of their flagship, digital banking and wealth management products. The goal is to increase upselling with the existing client base and to gain new customers, thanks to the combination of the platform robustness and the innovative features. Therefore, for the financial year '23-'24, we will continue to execute our plans to improve profitability and to get back into a phase of growth. Our guidance for the full year foresees moderate revenue growth in local currencies and a further improved operating profitability. This concludes the presentation and back to the moderator for your questions. Thank you very much.

Mr. Weber and Mr. Biollaz will now take your questions. [Operator Instructions] So Andreas Muller.

I was wondering, can you also give us some color about the moderate growth outlook in local currency for this year. What are the main drivers for the growth given also the environment?

As I mentioned in the presentation, there are 3 drivers for growth for this financial year. Of course, the Funding Portal has been completed. We are now in the process of acquiring new customers. That's one driver for growth. Then business banking is an application which will be modernized and also launched in the market. Business banking is an area with -- we consider high demand for. And thirdly, we have modernized our flagship products with our standard digital banking products and are in all markets very active in terms of acquiring customers and also upselling to existing customers. And that makes us confident that we will achieve a moderate growth in this financial year.

And on the profitability outlook, you're looking for further improving operating profitability. Can you give here some more color, for example, on some cost items such as purchased goods and services, personnel costs, and the like?

Thank you, Mr. Muller. It will be across the board, but predominantly, again, personnel cost and the other operating costs.

And also, they go down further from, say, H2 levels. I mean, there is still some room to grow there.

That is correct. It will be a continuous evolution in the year 2023 -'24.

Then my last question for the morning is, can you give an update about the midterm? I think you guided in the past, you have been saying you could grow double-digit on revenues and also have double-digit EBITDA margin. Is that still the case? If yes, when would you expect that? I assume it's not going to be this year, but can you give here some color?

Yes. Our long-term -- the midterm and long-term targets, of course, remain unchanged. CREALOGIX is in a growing market with very attractive products. That's why we believe after everything we have done now in terms of consolidating our products portfolio, modernizing our stack, and penetrating new segments, we will go back onto a growth track. This growth track, of course, will be moderate this year. But in the future, we foresee, of course, stronger growth rates as well as everything we have done that the profitability will sustainably in the digital -- in the double-digit area. This is our midterm target.

And now Mr. Rosenau.

If we compare the first and the second half, I mean, after the half year results, you said in the outlook that CREALOGIX expects further improvement in the EBITDA in the full year. Now in the first half, you made CHF 1 million EBITDA without the book gain of the disposal, and in the second half, CHF 0.4 million EBITDA. So that was not an improvement, it was a decrease. Could you elaborate on that? I mean wasn't it a disappointment for you as well?

It was not a disappointment for us as well. Excuse me. You're correct, the EBITDA in the first half year was CHF 1 million, in the second half it was CHF 0.4 million. That was pretty much in line with our expectations. However, as you remember, and as we also have stressed, the completion of the Funding Portal program, the first important phase has dragged along into the second half year. We had slight delays. But the good news is, we have managed by the end of the financial year to have completely finish this program, signed off by the customers and all 7 banks from the original agreement are live and we have no more contractual obligations from this very big, very large initial contract. And that slight delay in the second half year has impacted our EBITDA. We have realized that we have accepted it, and it was very important for us to complete that program in this financial year. And the good news is it has been completed and it has been signed off by the clients.

Then on the free cash flow. I mean, in the second half, you got to a positive free cash flow of CHF 0.4 million, which is not huge, but it's in the right direction. I agree to that. Of course, this year, we should expect a clearly stronger number here. I mean, what would you expect to generate on free cash flow in the current financial year?

Thank you, Mr. Rosenau. Look, we are not giving an indication, projection for cash flow as we did in the past, but we would expect it in line with our improved cost evolution as well minor sales growth and improved situation for the full year.