Enento Group Oyj (ENENTO) Earnings Call Transcript & Summary

Good afternoon, all, and welcome to Enento Group's Second Quarter 2021 Earnings Webcast and Conference Call. My name is Pia Katila, I'm Enento's Investor Relations Manager. Unfortunately, our CEO, Jukka Ruuska, is unable to attend due to sudden sickness. But I'm joined by our CFO, Elina Stråhlman. We will open this news conference with our Q2 presentation, followed by Q&A session. And for your information, all the presentation material is now available on our investor pages. And at this point, I will hand over this to Elina Stråhlman. Please, Elina.

Thank you, Pia, and warm welcome on my behalf as well to this Enento's half year results review. As Pia mentioned, unfortunately, our CEO, Jukka Ruuska, is unable to join us today due to sudden sickness. But therefore, I will instead briefly run through the Q2 highlights and results with you and luckily so, because we have definitely excellent results to share with you today. Our sales reached all-time high level in Q2, EUR 42.1 million, and profitability grew, respectively, with very significant rate. But let's start first with some Q2 highlights and other relevant topics and then continue with the figures in more detail afterwards. First, let's have a short recap on our strategy. In our strategy, we are targeting to strengthen our leading position in the credit information, be the first choice in data-driven business processes as a service and become the leading provider of business information. And now in Q2, we have taken and implemented some actions to help us reach these strategic goals. And to start from the first one, so from the beginning of Q2 onwards, we have operated on the new business area structure. Instead of previous 4 business areas, we now have 3 business areas, of which, 2 are new ones. In addition, we have 1 new functional unit called data and analytics to highlight the importance of the data in terms of securing, developing and leveraging it further. The key reason behind this organizational change is to simplify our structure, but also to definitely enable faster and smoother strategy implementation as well as more efficient service development and usage of data. Our largest business area, according to this new structure, is Business Insight, which represents a bit more than 47% of our revenues. And the purpose of that business area is to serve all sized customers related to their business information needs, whether it's related to risk management, customer onboarding, monitoring or sales and marketing, to mention a few. Consumer Insight represents nearly 45% of our revenues. And these business areas serves both business and consumer customers with their consumer information-related needs, whether they are credit or noncredit related. And finally, Digital Processes, that represents a bit more than 8% of our revenues, continues as is, serving needs related to real estate and compliance information and continues to digitalize and automize the related processes for our customers. Then the second action that we have taken in our strategic road towards the targeted goals is an add-on acquisition, strategic add-on acquisition that was made in June. In June, we finalized an investment of EUR 3.8 million in a company called Goava, which is a Swedish sales intelligence company. And with this investment, we acquired some 38% share of that company. With this acquisition, we strengthened our unstructured data capabilities and accelerate our new service development based on unstructured and refined data. And simultaneously, we also strengthened our position in capturing value from the fast-growing sales intelligence domain in the Nordics. A few words still on the unstructured data and why it is important for us. Unstructured data is such information that has not been structured in a predefined manner, and it is usually text heavy or otherwise difficult to analyze. And this means that one needs proper capabilities to extract and categorize that kind of data to make value out of it. But when it's done well, it creates unique information assets and great value and insight. And we believe that combining structured and unstructured data will enable us to create new services and predictions and improve current services likewise. And creating this kind of insight for our customers will be an important competitive advantage for us in the future as well. We currently use unstructured data in some of our services, such as growth indicator, ESG report, and decision-makers data. But with closer cooperation and investment in Goava, we will strengthen our capabilities and are able to build even more -- new more advanced services. Goava has, for example, created their own technology for crawling unstructured data and has strong capabilities in the areas of natural language processing, machine learning, AI and so forth. And overall, they have strong capabilities in developing intelligence out of the unstructured data. Goava is and has built high-end lead generators and target group analysis tools that are able to use real-time unstructured data in efficient manner. And these services can help customers to make better decisions and connect the data with their own CRM systems and databases. Thus, these Goava services, they help companies basically to return -- increase the return on those investments that have heavily increased in recent years in these CRM systems. And we see this overall as a growing market. Together with Goava, we have identified considerable synergies, which accelerate the growth for both companies. Goava will benefit from incorporating our Nordic structured business information to its services, such as their decision-maker and beneficial owner's data. And Goava can also take advantage of our brands and sales channels to accelerate customer base and sales. And this will enable Goava to become the leader in the field of sales intelligence. Through the partnership, we, Enento, we will, on the other hand, gain access to Goava's unstructured data and data-refining capabilities. And with those, we are able to accelerate service development further and growth within the business information. So as a summary, we believe that this Goava investment is an important strategic milestone for us, and it will help us in the road of becoming the leading provider of business information and this cooperation will enable better sales intelligence, insights and decisions for our B2B customers. As said, now we have made the first investment of EUR 3.8 million to this company. And with this, we have gained 38% share of the company. And this investment will be fully used to develop and further commercialize and grow the Goava's business and offering to that respect. Together, we have also built a 4-year business plan. And the aim is to deepen our partnership, and the plan will enable realization of the synergies on both sides. And finally, if the preset terms according to the agreement are met, we have an option to acquire the company fully then in 2025, but a really important milestone in the road of becoming the leader within the business information. Then as the third point, I wanted to say a few words on the platform transformation, which is also an important enabler in our strategic growth. Platform transformation is progressing well, and we have very strong project team in charge and running that transformation program. We continue to target significant benefits with an investment totaling of some EUR 25 million to EUR 30 million by '25 with this program. With the transformation, we will be able to accelerate growth through more efficient product development and have faster time to market. We will also be able to increase share of new services with increased scalability and effective usage of data assets. And obviously, we also aim to gain significant savings in IT maintenance and operational costs. Benefits, these benefits will start to accumulate gradually during the future years, along with customers adopting to the new services and the consolidation of legacy systems. We are now focusing the development to the new services and these consolidations as we -- and we continue simultaneously to run the existing applications in cost-effective manner to secure our customers' business processes. This approach, this will lower the risks for us and for our customers in relation to both transformation and execution. But on the other hand, it will enable us simultaneously to gain benefits gradually both on the revenue and on the cost side. We are progressing on several fronts with this transformation. And the highest focus now in the beginning of the program is in the Swedish markets as there, we have most old and we have several legacy platforms there in use. To mention a few focus areas in more detail. A large part of the Swedish consumer credit information data is already in the modern environment. And our plan is within the near future to launch targeted offering, serving e-commerce sector as well as daily credit register, serving the whole financial sector on top of this modernized data platform and environment. And we continue this work to transfer the remaining Swedish consumer data into a modern environment. And along with the transition -- transformation, we continue then to build new applications, enablers and APIs that will then able gradual migration for our customers from legacy platforms into the modern one. We have also continued to build the Nordic user experience and have launched proff.fi, beta version, aiming to support freemium business in Finland. And we continue with various consolidation -- consolidations in relation to systems and infrastructure to gain cost efficiencies. We also have piloted modern agile ways of working. So overall, a lot of things ongoing, a lot of things progressing, and we plan to accelerate the development even further. Then finally to my favorite topic, the figures -- figures of Q2, and as said at the results in Q2, they were excellent. As already mentioned, we had all-time high sales now in Q2. Our revenue reached EUR 42.1 million and grew by 11.4% with comparable FX rates. We had 1 more banking day more in both markets. Overall, the increase was supported by increased market demand in all our business areas, but the strong growth was especially driven by increased demand of Swedish consumer credit information services as well as the continued growth in the digital processes, real estate services and good contribution from new services in all our business areas. Also, the profitability developed very positively. Thanks to the scalable business model, high growth in the scalable services combined then with cost consciousness and savings and synergy benefits gained, the adjusted EBITDA margin expanded significantly by 4.3% from previous year, and the adjusted EBITDA margin reached 38.2%. Adjusted EBITDA in euros reached EUR 16.1 million. So overall, very strong quarter and very handsome figures. Also, the EBIT grew in line with EBITDA development. And the official EBIT, according to IFRS, expanded even more due to the fact that we had very limited amount of items affecting comparability in this quarter. New services also continued to grow and were 7.4% in Q2. And we launched 7 new services during Q2. And overall, during the first half, we have launched 18 services so far. And these services launched this year are already generating good revenues. And to mention one good success story and example, the Nordic Growth Certificate that was launched in Q1 in Sweden already generated very handsome revenues and growth for business insights freemium solutions now in Q2. Then if we then move on and look at the business area development in a bit more detail. So as said, we had very good development and we saw good growth in all our business areas. And the growth in all business areas was supported by the good market demand, increased market demand and contribution from new services. Business Insight, that grew by 7.4% at comparable FX rates, thanks to strong growth, especially in the freemium services for SMEs in the Swedish and Norwegian markets and recovering freemium business as well. And the biggest contribution from new services was seen under this business area. And also the Nordic Growth Certificate just mentioned is part of that -- part of this business area's revenues. The biggest business line on the Business Insight, the enterprise services targeted at large customers, continue to develop more moderately despite the good performance of new services. And this is due to the fact that the company lending levels have remained on low levels simultaneously when we haven't seen any increased levels of payment defaults, no bankruptcies, thanks to both governmental subsidies and then market recovery that has now started to support businesses operations. Consumer Insight, on the other hand, turned to strong growth in Q2 and increased nearly by 12%, thanks to good development in all business lines there, but especially, thanks to strong growth in the Swedish consumer credit information services that clearly came now earlier than what we previously had expected. On the Consumer Insight also, the direct-to-consumer business continue to grow steadily and likewise, the sales and marketing-related B2C services in Finland. So overall, very strong performance under this business area in Q2. Thirdly, Digital Processes, the very high growth in that business area continued. We continue to see very high level of housing transactions. But this kind of very high growth has now continued for the last 4 quarters. So it is good to note that for H2 then, we have very tough comparisons against us, and we expect that this kind of development will flatten now in the next half. Regarding the profitability, so adjusted EBITDA increased significantly and grew clearly faster than revenue with 26.3% and reached EUR 16.1 million. The positive development was thanks especially to the scalable business model and high growth in scalable services, but also continued cost consciousness and synergy and savings actions taken as well as somewhat the weak -- weak comparisons likewise. Previous year in our comparative figures, we had, for example, still high costs in relation to Proff integration, IT integrations, and we also had some IT-related incidents impacting our results. Materials and services, i.e., our data acquisition costs, those grew slightly but clearly, with slower pace than the revenue. The growth came from Finnish real estate services and sales and marketing-related B2C services in Finland, which both come with variable data acquisition costs. But the increase, as said, was clearly slower than the revenue growth, and that is thanks to the fact that the sales growth largely came from scalable services with mainly fixed data acquisition costs, such as the Swedish consumer credit business and housing transaction services likewise. Personnel expenses increased following the increased amount of FTEs that we had and also due to higher amount of sales and other incentives for our own personnel following the strong financial performance. We have continued with our in-sourcing activities, especially under IT, which increased our personnel expenses. But on the other hand, we see an increase in the capitalized own development work due to the same reason because we have now more -- we are now doing more service development with our own personnel. Also, we saw savings in IT-related costs under other operating expenses for the very same reason. But that decline was then mitigated by the increased sales commissions. And the external sales commissions increase was due to the fact that we saw very high growth in the BI freemium segment in Sweden where the sales is telesales-driven. Free cash flow. Free cash flow declined somewhat despite the positive profit and sales development. And the main reason behind this development was negative impact coming from the change in working capital, following the increased level of trade receivables as well as tax payments, also including some final tax payments for previous years and as well then higher level of investments. Investments were some EUR 2.5 million higher in this Q2 compared to previous year, following the acceleration of the platform development, high focus in service development, but also in connection to timing of certain investments related to infrastructure consolidations and server acquisitions and such. So overall, the cash flow for the first half has been impacted by timing of both sales and purchases and investment and tax payments likewise. But on a full year scale, we continue to expect that the cash conversion will be close to normalized 60% level. A few words on the balance sheet side. So we have some EUR 7.4 million of cash at the end of the quarter. After -- and this is after the dividend distribution of EUR 23 million and Goava acquisition of EUR 4 million during the quarter. And we also have unused revolving credit and cash flow facilities totaling EUR 35 million as total. So our cash flow and liquidity position continues to be strong. Net debt to adjusted EBITDA remained on good level at 2.7 and well below our long-term target maximum of 3. Then finally, in the beginning of July, we upgraded our sales guidance following the strong performance in Q2 and especially the performance in the latter part of the quarter. The strong demand in the Swedish consumer credit business clearly exceeded our expectations as we were expecting the markets to recover only during the latter part of the year. And due to this, we have now updated and upgraded our sales expectations for the full year. According to the new guidance, we now expect our revenue to grow on a full year scale between 7.5% and 10% while previously, the expectations was that the growth would be somewhat below 7.5%. The outlook for the adjusted EBITDA and capital expenditures have kept unchanged. We saw clearly a strong growth in the adjusted EBITDA now in Q2. But on the other hand, it is good to note that we had rather weak comparables to compare it in the clearly tougher ones now in H2. Previous year's H2, our activity levels were very low, and we gained good savings only because of that, but also due to the fact that we were taking active measures to secure our business, for example, adjusted our marketing activities and spend, freezed recruitments and did various actions on the savings side. So therefore, we expect that the cost levels will normalize in H2 now that economies are recovering and restrictions hopefully are being then removed likewise. Then as said, the outlook for the capital expenditure, that has kept unchanged, and we expect the investments this year to exceed previous year's level due to the fact that we are accelerating our investments in the platform transformation program. But thank you. This was now what I had to say about the figures. Pia, will you continue now with some changes in the management?

Yes. And then to the management issues. As we communicated last week, Mrs. Jeanette Jäger from Sweden has appointed Enento Group's new CEO, and she will start in her position on the 1st of January 2020 (sic) [ 2022 ]. And Jeanette comes from the Swedish fintech company, Bankgirot, where she has worked as CEO since 2017. And prior to that, she has acted in different executive positions in Tieto and TDC Communication. Our current CEO, Jukka Ruuska, will continue in his position until the end of October. And we will communicate separately about the CEO duty arrangements from 1st of November until the end of the year. And then Enento's CIO, Jorgen Olofsson, announced his resignation for personal purposes in May, and he'll continue in his position until the end of November. And the last one is Director of the Business Insight business area, Heikki Koivula, also for personal reasons, announced his resignation and will continue until the 15th of January next year. And then we go to the last topic of our presentation, sustainability. We published our first sustainability review in June. Naturally, we have published our nonfinancial information report earlier, but this is the first one so-called report. And it's based on our commitment to net zero emissions by 2023. Please visit our investor pages, you will find this review very easily. And now I think this was all regarding our presentation. Let's go for the questions. So -- and we start with the questions over to the telephone conference line. Please, operator.

[Operator Instructions] We will move on to our first question from Matti Riikonen of Carnegie.

It's Matti Riikonen in Carnegie. A couple of questions. First, regarding the adjusted EBITDA guidance. So when you raised your top line guidance, you didn't basically change your adjusted EBITDA guidance. And I was wondering that -- where does the cost increase come from that prevents you from basically saying that operating leverage would work in a normal way? So that's question number one.

Yes. Thank you for the good question. So first of all, our original guide already in our original guidance, we were expecting the Swedish consumer credit market to start recovering in the latter part of the year. So basically, what has now changed is this good performance in Q2. What then comes to the profitability in H2 is that, obviously, we will continue to see growth in the scale of our products, such as the consumer credit information in Sweden or at least that's what we expect to see. But on the other hand, in H2, the growth in Digital Processes, which has been also very scalable, is expected to flatten because housing transactions and volumes started already increasing very heavily than the previous year's H2. So in that sense, we don't think that the transaction levels can continue to expand on the same level. So we are meeting tough comparisons to that respect. Also, as said, in Q2, we had rather weak comparisons to compare against it. We still didn't have the COVID savings running fully. So they were heavily concentrated in H2 previous year. In -- so in -- so Q2, in that sense, was a bit of a special quarter, so to say, in terms of cost level, if we think about the COVID times. But we then gained very good savings previous year in H2. We had a clearly lower level of our own activity. And as said, we had freezed our resourcings and recruitment, we adjusted our marketing spend and so forth. So all these costs we expect to normalize then during the latter part of the year. We also expect to see some increases from the platform transformation program, the double cost impact that we have been talking about. We have currently several positions open, and we are also backfilling the project resources, our internal project resources with external higher-cost consultants, which means that the cost levels will be burdened by this fact as well. So I think that these are the key reasons why we haven't changed the adjusted EBITDA guidance as such, but we continue to expect it to -- the margin to expand somewhat during the full year.

Okay. I basically understand with your reasoning. But basically, all the reasons that you said were those that we already knew before Q2 and when you basically stated the full year guidance. And now what happened in Q2 was that it became better than expected. So one would expect that if you reach a higher top line, then naturally, the margins, assuming the costs would be the same as you anticipated before the good Q2, basically, costs would be the same. So my question was mainly related to that. What happened to the costs that basically make you increase your cost estimate as well as the top line estimate and prevents you from basically hiking the margin guidance as well? So is the new -- something new in the costs that basically came as a negative surprise, although you had a positive surprise in your top line?

Well, overall, we have better visibility now, for example, in the platform transformation than what we had when we were giving the guidance. And recruitment ramping up and resourcing of that is clearly one factor that was not fully taken into account. We perhaps saw less costs than expected now in H1, but expect to see higher cost levels from that project then in H2 when we accelerate that development. Also, overall, we -- as said, we upgraded our sales guidance now, thanks to strong performance in the consumer credit business that started perhaps somewhat before than what was anticipated. But overall, when we look at the full year, obviously, we have some other changes, for example, of what we expect from the sales mix. For instance, we were expecting perhaps somewhat higher volumes in highly scalable Business Insight services, enterprise services, risk management and monitoring related. But on the other hand, those haven't realized and haven't been picking up due to the reasons that I just mentioned. On the other hand, we have seen much stronger growth in the freemium side that we originally expected. And that, again, is -- comes with a bit more costs. So there are various explanations in this likewise.

All right. That's pretty helpful. It improves the transparency because otherwise, the idea would have been that you are just being very cautious and conservative. On technical things, still, how does it work with the banking days in the second half versus last year? Will you have any technical changes there?

Basically not. I think that we have 1 banking day less of -- what was it? Sorry. Now we have 1 banking day difference in the Swedish market, but it is during the Christmas period, so we don't expect that basically to impact H2.

We will now move on to our next question from [ Eric Wheeler ] of SEB.

This is Pete-Veikko Kujala calling from SEB. One further question from the guidance. You mentioned also in the release already that it's Q2-driven. But from your kind of discussion here earlier, does that really mean that this is purely a Q2-driven guidance upgrade so that your expectations and your visibility in the second half haven't changed basically at all, so this is just 1 quarter that impacts the full year guidance? That's it.

So technically, it is the 1 quarter that impacts the guidance. As said, we have a more validated view on the H2 revenue development in terms of sales mix, but the overall view hasn't for H2 changed on group level. So yes, you are correct in your assumption.

[Operator Instructions] And it appears we have no further questions over the audio at this time.

And then we have received online questions. We have Felix Henriksson from Nordea. Do you still expect the temporary interest rate cap of 10% in Finland to be removed at the end of September? I believe there is still some hesitancy related to this amongst consumer lenders.

Yes. We also have moderated our expectations in terms of the -- removing of the interest rate cap. Obviously, we don't have any more information than perhaps other public sectors in this respect. But there has been some rumors, so to say, that it could be further continued. And this is something that we have also taken into account in the overall forecast for the full year of the group.

And then second question from Felix Henriksson. Could you please compare the recovery seen in consumer information market in Sweden versus Finland?

Sorry, what was the first question?

Could you please compare...

Compare, yes.

Good.

Yes. So basically, in Sweden, as said, we started seeing very strong recovery in the consumer credit business, thanks to recovering markets and remote restrictions in the Swedish market. But on the other hand, in Finland, very good question, there, we didn't see recovery at all in the consumer credit information business. But the business continues still to decline due to the fact that we actually had tighter interest rate cap, 10%, now in effect compared to previous year. So basically, we are not seeing recovering volumes in the Finnish markets. And that is, to our analysis, due to the tight interest rate cap and the fact that it limits the lending possibilities for consumers and lenders likewise.

And then third one from Felix Henriksson. Was your recent guidance upgrade purely driven by better-than-expected volume growth in the consumer information services in the Swedish market during Q2? Or has there been a change towards better-than-expected development in other business areas as well?

Yes. So the main reason behind the upgrade was, as said, the Swedish consumer credit business and unexpected high demand. Otherwise, we don't see too high deviations on group level against our expectations. As said, in terms of the sales mix, some expectations have changed. We perhaps expected more from the Business Insight enterprise services and perhaps somewhat less from the Freemium Solutions and freemium services. But overall, on group level, the key driver is purely the consumer credit business suite.

And then we have Daniel Lepistö from Danske Bank. What specifically boosted the consumer information services demand in Sweden? Yes. Actually, you -- I think you answered it. Can we expect similar trend in Finland as the temporary interest rate cap ends in September?

Well, in Finland, as said, of course, if the interest rate cap is removed, it will be taken back to the 20% level, which, still, will limit the lending opportunities of the players and the consumers likewise. So in that respect, we don't expect to see similar hikes in the Finnish markets even though the temporary cap would be taken back to 20% level. But clearly, that could bring some boost to the revenues, that is our expectation.

And then the second one from Daniel Lepistö. How is the demand with the ESG report? Has it changed traction? Is the demand increasing? Or does it produce notable revenues yet?

Yes. The Finnish ESG report that has been launched already a couple of years back is generating a good amount of revenues already. And clearly, the interest towards that product and sustainability products as such has really increased in the recent periods definitely, thanks to all the public discussions ongoing around this topic and companies' increased interest in the ESG-related matters.

And then the third one. Do you see pressure with the salary inflation near, medium term -- near or medium term?

Well, I guess it's fair to say that we see some pressures in the Nordic markets, especially within certain high-end professionals, especially under IT. What we have noticed now in the recruitment is that IT resources are scarce, so to say, at the moment. And clearly, there could be some pressure for higher salaries and inflation, but no -- not big on an overall level.

And then we have follow-up question from Felix Henriksson. How far is the business information market, below prepandemic or normal levels?

Well, the business information market, overall, it actually was fairly resilient and steady during the pandemic. So we didn't actually -- we didn't see any major volume increases. We didn't see too big declines either. But what -- but when we talk about this enterprise-targeted services, risk management and monitoring services for businesses, there, clearly, the volumes have remained unchanged. So it is fair to say that they are on prepandemic and pandemic level on -- in rough terms.

All right. And that was all regarding the questions. Thank you.

Thank you. Thank you for the good questions. And thank you on my behalf as well. So I guess we will now close this results review. I want to wish everyone then a happy and great summer and hopefully, good summer holidays as well. Thank you.