Exsitec Holding AB (publ) (EXS) Earnings Call Transcript & Summary

[Audio Gap] Year End Report for 2023 for Exsitec. Presenting will be CEO, Johan Kallblad. And with that, I leave the word to Johan.

Thank you, Hampus. So we are going through financial results of 2023. Talking now is me, Johan Kallblad, and I am the CEO of Exsitec. I expect this presentation to last around 50 minutes. It is possible to ask questions via the hand raise function in Zoom or by sending an email to [email protected]. And as usual, I will start off by making a short recap about our business to give a reminder of what it is that we do and after that, we'll cover Q4 financials and the full year financials 2023 and do a short market update and talk a bit about our priorities going forward into 2024. All right. So we exist to help medium-sized businesses in the Nordics use digital tools to improve their operations and we aspire to be a 1-stop shop so the customer can focus on their core business and leave the business side of IT to us. Digital tools can address areas like reducing financial administration through automation or use data for better decision-making and it can also be creating integrations and information flow between the business applications used in an organization. So we market and sell a portfolio of software components that we can combine in a modular way into various target markets and our main target market in general is medium-sized companies with at least SEK 50 million in revenue. So we created some bundles of software to fit different industries and these bundles are often made up of the same foundational components like an accounting software for instance with some industry specific add-ons. There is not a size limit upwards on where our model works, but we don't actively target the enterprise segment in our sales and marketing. We have around 4,000 active customers spread through many different industries today and typically in a year and no 1 single customer is more than maybe 1% to 2% of revenue. All in all we've selected around 20 software components that we combine with integrations that we develop in-house. These are the primary software providers at this time. We have a revenue share partnership with these software providers where we market and sell their software to new accounts and make customers successful in using the software over time. A leading customer for us can use up to 5 or 6 different components from us, but the average customers today is only at just over 2. So there's a lot of work remaining in growing our footprint on existing customers by helping them automate more business processes. The business model then it's built on 3 revenue streams. Sales and marketing, like I mentioned, is focused on selling software together with integrations that we develop in-house and this is sold on a subscription model where you pay as you use and this revenue stream is around 20% of our net revenue. Just about 2/3 of our revenue is from professional services where we implement the software and we make customer successful in using the software over time. We also do custom development and custom integrations where needed. The third revenue stream in our business model is that we offer the customers a single point of contact support on a recurring fixed price model and in this engagement, we can also take care of things like infrastructure and Internet access and IT security. So I've had the pleasure of overseeing this operation since 2010. I'm really proud to announce that 2023 marks 10 consecutive years of growth with increased profitability. We have been a little defensive for large parts of 2023 in uncertain macro environments and we have been prioritizing margins over maximum growth. We typically like a balance of organic growth and growth through M&A, but we didn't complete any major acquisitions during 2023, but still achieved stable growth. So it's time to get into more of the financials for 2023 and Q4 in particular then. So going into the numbers. The primary priority in 2023 was to strengthen margins and give us a strong foundation for future growth. We're happy to report that we have growth in all areas in Q4, 10% organic growth and 12% overall. This is marginally higher organic growth in Q4 than we've had for the year all over where we've grown at 9% organically and 14% overall. The turnover in the quarter of SEK 211 million was the highest turnover ever in a quarter for Exsitec and the full year revenue of SEK 751 million obviously also is a new mark. We're happy with this overall growth number and we also feel that it's growth with very high quality with recurring revenues growing at twice the pace of overall revenue and for instance the use of subcontractors is reduced, which is good for [ convenience ]. So as for margins, the adjusted EBITDA is SEK 45 million in the quarter. This is the best Q4 to date and our best quarter ever. That's actually not a given in Q4 as we still have a lot of costs for running our trainee program that we started in August with around 80 new employees. All segments performed better than the same period last year. I mentioned in the written report that we have a good product mix in our sales. This means that we have sold things at good prices that we're able to deliver with relatively low risk, which has a positive impact on margins. For the full year, we are improving EBITDA margins from around 14% in 2022 to almost 18% in 2023. The business unit in Sweden has performed on a level above our long-term financial growth for the entire quarter. So very solid margin improvement for the entire year and what we feel was really an excellent finish of the year. So moving into segments in a little bit more detail. Like I mentioned, we had what I feel was a spectacular performance in Sweden in the quarter with solid good growth and exceptional margins. Really good resource utilization and good cost control overall. Norway who had a really weak 2022 is performing a lot better quarter-over-quarter with a 12% margin improvement over the same period in 2022. While it's a tough ask to match the performance from Sweden, we do feel that we have both the scale and the offering and the leadership in place to close the gap a bit in 2024. Denmark is struggling and working hard to reach scale. Over the last 2 years, we've really retooled the business divesting our point-of-sale business in Q3 of '22 and investing in the offerings from Visma and Qlik. Sales of new implementations has more than doubled during 2023 and while we also expect 2024 to be a year of investments, we're getting closer to critical volume in our key offerings. So the recurring revenue stream from software is a nice consequence of our business model that helps us having more stable results over time. There clearly were some market challenges during 2023 with customers for instance reviewing license usage and removing unneeded users to adapt to a slower economy. On the flip side, we can still execute on a long-term trend where customers move from older on-premise systems that typically were sold on a perpetual license model to cloud-based solutions with a recurring SaaS revenue. So all in all, a solid and growing revenue stream with total growth of around 25% year-over-year, which is also a number that we feel really good about. Maybe 1/3 of the increase is due to price increases. But on the other hand, there for sure has been instances where price increases has triggered a downscaling of a license. So the new sales is the most important growth factor here. So rounding up financials. The Board of Directors proposes a dividend of SEK 1.75 for 2023, which is the same dividend as for 2022, which amounts to a total EBITDA number of approximately SEK 24 million. This is about 33% of our earnings after tax and a bit below our typical ambition to distribute 40%. But we feel we should have good alternatives to allocate capital to growth initiatives so we decided that this is a level that we feel good about. Going into 2024, I want to give a little market update and some other updates on priorities. So first, we announced an acquisition in the mid of December of 2023, which we closed in January 2024. IntegrasjonsPartner is a company that produces an integration platform that can be used for many different ERP systems, but the biggest market for them has been for software from Prisma. We know them well in Norway and we think this platform can help us increasing the speed in our cloud migration efforts. We have a large on-premise legacy customer base in Norway where integrations is one of the key factors for a move to the cloud. We paid NOK 60 million upfront and then an additional payment based on improving results in the business unit for 2024. There is a reasonably clear path for improving profitability so we expect this deal to increase our revenue by NOK 55 million and our EBITDA by NOK 9 million for 2024. The deal is financed through debt and our own funds. Net debt to EBITDA is still on a low level well below 1 even after this acquisition. Some words about the market closing out 2023. I track 4 primary KPIs when I monitor sales. How many leads do we generate? How long time is it between a qualified lead and a sale? How many sales do we do in total? And what's the average order size? As I've reported since late I think already in 2022, the lead times are longer than historical average and in Q4 they're actually becoming even longer after being more static for a few quarters. So we spent about 80% more calendar time on every closed deal than we have had historically. The order size has decreased a little in the quarter, but this is after some times of increased deal size so we're around historical average on deal size. On a good note, we made a lot more deals in Q4 than in Q4 of 2022 and the lead intake is up a solid 38% compared to Q4 of 2022. So we do feel good about our offering and our market position in general as evidenced by the lead generation and the number of deals closed. However, we see no real market improvement really. So we expect sales to continue to be a struggle also in 2024 as it has been in 2023. So what does this mean for Exsitec seeing that sales cycles are so long? I think I should elaborate a little on what that means. So first thing is that sale cost increase and the sales people need to work harder to manage a bigger deal pipeline, larger number of deals to reach their sales numbers. Slower new sales can possibly result in lower staff utilization in our professional services. On the other hand, it may be easier to retain our employees since the market is probably slower for everyone. So it will be easier to retain staff, then we don't have to spend as much money on training new colleagues. To maintain the utilization rate, the consultants need to focus on existing customers and not wait for sales to provide them with work. All in all where this all ends up is that it comes down more to execution both regarding internal efficiency and in terms of sales and so far so good. We have a cautious, but optimistic view on 2024. We think actually for the entirety of 2023, we've been working in a relatively slow market and we performed really well by this cautious approach, cautious but optimistic. So business priorities for 2024. First, we are really proud to have executed on the priority of operational excellence in 2023 and obviously maintaining this is key. We strive for further improvements in Norway and in the e-commerce business in Sweden that I must say turn around in a positive manner during Q3 to Q4. We're also trying to prepare the organization for growth when market conditions provide the right opportunities. The most important low-risk growth opportunity for us is to increase the number of offerings per customer. And we're doing this by engaging long term in the customer relationships and making sure that we have an offering where our clients can grow with us and also reducing barrier to expand the offerings. We have a large sales force already. But as I've talked about, longer deal cycles take more sales efforts for the same output. So we are doing a push this year and building our sales capacity further. And I will take the opportunity here to inform you that if you know of people that have the right mindset that want to get into a career in software sales, Exsitec should be a great place to start. I advise people to check out the recruiting for our sales academy that we just launched on our website and on LinkedIn a few weeks ago. Lastly, we think that the M&A market possibly can heat up during 2024 as there may be a little less uncertainty on financial costs and hopefully this should make valuations easier. Selective M&A is always a priority for us where we have had a really good track record. And that concludes the presentation. If there are any questions, please feel free to ask.

Hampus, did we get any question today?

Yes, we have received question. We can start with Tom.

Can you hear me now?

Yes. Perfect.

Congrats guys on a strong report. I have just a few questions. First of all, in the Swedish business. Can you comment on the margin side? Is that a structural difference to the market or to your organization here in Q4 you show exceptionally strong margins or is it more of a timing effect?

It's a little bit of each. Obviously to reach those margins, we need to have a good structure and we also need -- to some extent, we need some luck. But if we start off with the structural perspective. We did do some reductions in force earlier and to basically focus little bit more on finance automation and a little bit less on for instance e-commerce or some of the e-commerce initiatives and so on. So we moved staff around a little bit and we also added some staff and reduced headcount in some earlier. We did that primarily in Q2 and then Q3 it's vacations and things and Q4 it seems like we executed well with the organization that we have. So on an operational level, it was a really nice performance. Then if we get closer to the luck part of it, we also reached for instance some sales with some of our vendors. We can get additional bonuses and things if we reach certain thresholds in terms of sales performance. And we had some really nice successes in the overall sales that were actually -- where it turned out that software cost was actually a little bit lower than expected so margins from software was a bit higher than expected. So that may be more of a one-off. But on the other hand, we feel that executing on strong sales is sort of -- it's what we do also, but it may have been -- it was maybe stronger than expected in Q4 if that makes sense.

Yes. And just a follow-up question on software prices in 2024. What sort of price increases are you expecting here because it's been somewhat inflated during '23 of course?

Yes. It varies from different software vendors. I think we see when we do this in talks with our software vendors. As before, typically for us the labor cost index is the most important index. There is very low movement actually in labor cost index so it's not going to be -- on existing contracts that are based on labor cost index, it's not going to be a lot of price increases. But we see somewhere between 0% and 10%. And so some vendors are pretty aggressive in increasing prices and some are very cautious. So if you compare with the year before where everybody was very aggressive, they're definitely less aggressive this year, but we do see some lag in price increases actually. So there are some price increases going into 2024 also.

And just a final question on the working capital. You had quite a significant buildup here in Q4. Is [indiscernible] timing as well?

Yes. It's a lot of invoicing last -- actually the buildup is in account receivables and account receivables have very high quality not a lot of late payments. There was a lot of billing going on late Q4 actually. So we should see that normalize in the next quarter. Then I also have to say the 2022 numbers were a little bit unusual in the other end, it's where we actually got paid for. We sold a part of our business in Q3 and we actually got the money in Q4. So cash flows in 2022 were unusually good in Q4. But there was a lot of billing late Q4 that built up account receivables. So I have some written questions here. Do you want me to read them? From [ Karl Larsen ] here? How is your e-commerce performing today? Do you see any difference in the number of new deals or are customers still cautious about investing in new platforms? So really good question here that I did not elaborate on. We've actually done an internal shift in our e-commerce business and we focus much more -- you can use e-commerce. If you look at the tools around e-commerce and what you use them for, it's both commerce like driving sales, improving, opening up new sales channels and those things and you can also apply the same tools in doing things to reduce administration, for instance creating like customer portals where our customer can log in and download their invoices and see order statuses and so on and basically reducing administration at our customers. So you can use - the same e-commerce platforms you can use both to improve sales, open new channels and to reduce administration. We've chosen to focus our sales effort almost entirely on the reduced administration sort of application and that we feel that we've been reasonably successful with in terms of closing deals and we've been very successful in building a sales pipeline. There's a lot of interest in the market we feel about using e-commerce tools to reduce administration. So my question there -- my answer is twofold. So there is a caution about investing in platforms to basically believing that I can drive new sales and open sales channels through e-commerce. There's a caution around those types of investments, which I think don't make sense. I think it's a perfectly good time to invest in e-commerce right now to open up new sales channel if you're a medium-sized business. But I see our customers are reluctant in doing that investment and the cheaper platforms are selling better than the more expensive ones. But there is the application of using e-commerce tools for reducing administration. That market seems to be pretty good or maybe it's just that we've been lacking in or scaled perhaps in targeting another segment that has been more offensive. Then I got another question. Is the e-commerce sector an anchor for your profitability today? Not really, no. I think we looked at this last year. I don't know exactly from on top of my head. But all in all e-commerce 2022 I think was around 8% of sales and it's lower now. So it's not an anchor. So I would say it's somewhere between -- it's less than 8%, it's probably more than 4%. So 4%, 5%, 6%, something like that. And then I've got 2 questions around Denmark here. First, can you through a little bit more about margin development in Denmark and what we see going forward? Yes. So the margin in Denmark has been flat since last Q4. We do expect this to get better. The big investment has been building sales around Visma.net and building a delivery organization. Visma.net was only launched about a year ago formally. We had some clients like Swedish, Norwegian clients that also have business in Denmark that use Visma.net. So we had maybe 10, 15 clients in Denmark. But now we closed around 20 deals this last 12 months and we need to -- that's like 15, 20 new implementations of Visma.net. It requires staff on our end, it requires competence, it requires effort to sell. And we're not yet at a critical mass. You probably need 40, 50 clients to have a stable flow of consulting work and a good coverage of support costs and so on and we're not quite there yet, but we're a lot closer than we were a year ago. So Denmark specifically, we need maybe 6 to 12 months more of successful Visma.net sales and then we'll be at good critical mass there. We do expect margins to improve over time, but it's actually not. As you can see here, we went from SEK 12 million to SEK 16 million in revenue the last if you look year-over-year. So I will be more happy with reaching SEK 20 million in Q4 of next year even if margins is at 10% rather than keeping the size of the business the same and improving margins to 15%. I would prefer little bit more growth before it's time to maximize for margin. That's for Denmark. As for Norway, I think we wouldn't mind scaling a little bit, maybe becoming a clearer market leader in our space. It's a more fragmented market in Sweden especially around implementing Visma ERP. There's a lot of players and a lot of competition in the Visma space. So we wouldn't mind becoming a little bit more clear market leader. I think we are #1 right now, but it's not a big gap between us and #2. So some growth, but then it's around internal resource usage and internal efficiency. We have a stronger culture I guess in Sweden of running the business on a little bit higher utilization rates and we need to improve the internal operation. They've done good strides in Norway year-over-year, but there's still more to do there. So let's see here. From Karl Noren, SEB, I think. Number of employees almost flat year-over-year in Q4. What are recruiting plans for 2024 since we need to continue to hire? Yes. We expect to run the same size, hopefully a larger size training program again in Q3 of 2024. So we are recruiting for that right now and we also do an extra push in the sales side where we aim to double the recruiting of new sales people. Some of the personnel -- we have a negative thing around personnel turnover. We always have personnel turnover, but we're right now feeling that turnover rates are lowering so we need to like scale our recruiting. We do definitely intend to recruit. Probably we should try and have the same size of recruiting as we did last year. But we also want to make sure that we don't over recruit compared to demand and we come from a situation where with a very competitive job market where it has been hard to retain staff. So we've had to invest a lot of recruiting all the time to replace people that also left us. And if that becomes a little bit easier, we can recruit a little bit less. But I expect pretty much recruiting to be about the same level as 2023. So those were the written questions I had in my Zoom here. Do you have any other questions, Hampus, here?

Yes. We have a follow-up question from Tom.

Yes. Just a question on Norway and the cloud composition. Can you give us any indications on timing amongst your customers there moving to the cloud-based CRP?

Yes. It's a lot of work remaining and I've been open to this when I've had questions before during the entire year. This migration is going to be our most important thing to do probably for 3, 4 years to come. So still I think it's around 10% migration so far of the old Visma business customer base. We also have another customer base. It's not at all as big, but it's maybe more acute timing-wise. It's an older ERP that's not very common in Sweden, it's called Visma Global where there is actually no true migration path, there is no cloud version. So you need to convert to Visma.net or to BUSINESSNEXT. But those are harder projects because it's not a clear migration path and that's been known for some time and we converted maybe 20%, 30% of those customers into something. But we're only maybe -- so all in all, in the entire customer base, maybe we're only 15% or 20% through the journey and 80% remaining. If that makes sense. I could elaborate. If there are no more questions, I'll do 1 piece of elaboration just so that you can understand the complexity here. It's pretty straightforward doing this migration, but it's a lot of work because you need to re-engineer integrations and you need to re-engineer custom development. If you have an on-premise software, you can often do custom development inside of the software whereas if you move to a cloud environment, obviously you can't change the function of the software. You can configure it and change some of the things, but you can't change the core functionality of the software in a public cloud environment. So you need to build -- you need to find other solutions for the customizations. But the integration is the same thing. You can't move and write directly into the database, you need to use APIs instead. This is why we need IntegrasjonsPartner and their capabilities. So it's actually -- one other thing that hinders us from increasing the pace of cloud conversions is that we don't have the capacity on the development and on the technical side to do the conversions even if we have a consultant. So that is 1 challenge that we have and for some things even, we don't actually know how to solve. There are some on-premise custom developed functionality where we have no cloud option right now. So we're also searching for adding things to our portfolio. It's going to be a laggard among our customer base where we simply don't have the solution. So we want to do that while at the same time also selling the true born in the cloud functionalities into new customer bases where we've been very successful in Sweden. In Sweden it's not so much about migration, it's a lot about new sales. And so it's a cultural thing also. We're taking care of and re-engineering a customer base that we work with for a long time in Norway while at the same time doing new sales. And it's a bit complex to manage both growth and cloud transition in the same operation. So I think we should expect Norway to not be running on optimal internal utilization rates for a year or 2 more, but it should get better and better.

How much of a copy paste do you use once you figure out the technical issues among your Norwegian customers?

I think if I call it copy paste, my professional services staff will be upset with me. But for sure we are building repositories of things where there are common business problems that you solve the same way. We try to do them all in a structured way to build repositories of code. So whether we do it as product or whether we do it as more a repository code for reuse, it depends a little bit on what side there is. But definitely there were things where we spend a lot more time than what we can charge for on the first project and then probably on the second, third or fourth project, we get into a situation where we can do a lot of reuse. So we're definitely aiming for a high level of reuse if I use that term rather than copy and paste. But we're aiming for it. But then there are also custom specific things where it has to be a one-off. But I think most business problems -- you're not alone. Most business problems have been solved by somebody else at some other place before. So hopefully, a large level of reuse.

So we've also got another question from Karl Noren. How do you view your financial targets at the moment in the current market? What will be easiest to reach, to reach SEK 1 billion in sales or to reach 20% in EBITDA margin?

I thought we were going to reach both because that's the financial goal. So I haven't really thought about it. It depends. It's one of those trade-offs as you can see. When you saw us do a little bit more defensive less acquisitions. Typically when we acquire a company, they will run at less profitability than we do and then it takes some re-engineering. Sometimes it takes scaling to reach profitability, sometimes it takes cost control, but it takes some level of re-engineering to reach the same profitability. But I think what you see here in this last report is that when we spend a year focusing on operational excellence and lifting the performance. As you can see quarter-over-quarter this year, we do feel that our financial targets of the 20% EBITDA margin, that is possible. So just give us some time to execute on that and then we should be able to reach those things. But then it will be to some extent on -- the trade-off will be that we may not grow as fast because it's hard to acquire companies that run on the same scale. So it's a bit of a trade-off. I think we'll try to be wise here. If there are good acquisition opportunities, we may grow faster and accept that profitability takes longer time. If on the other hand if we feel that the prices are wrong and the quality of the acquisitions is not right, then we'll focus more on organic growth and then maybe margins will come faster and growth will come slower. So I mean we have the financial targets that we have and we'll let everybody know if we decide to change them or clarify them.

Yes. If there's no more questions, we would like to thank you all for attending.

Thank you.