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

Welcome to this quarterly presentation for Exsitec. Presenting today will be Niklas Ek, CEO; Carl Arnesson, CFO; and me, Hampus Strandqvist, Head of M&A and Investor Relations. [Operator Instructions] And with that, I'll leave the word to Niklas.

Thank you, Hampus. Hello, everyone. This is Niklas Ek speaking. I am the new CEO since the beginning of March. I will start off by making a short recap about our business as a reminder of what we do. After that, we will cover Q1 financials and a short market update and also a recap of our priorities going forward. So Exsitec. We exist to deliver digital solutions that improve our customers' businesses, and we aim to be a one-stop shop to the customer. We do this by selecting different softwares and develop in-house integrations that can be reused. By implementing different software and provide long-term support, we aim to be a single point of contact for our customers. The digital tools that we use can address areas like reducing financial administration through automation or use data for better decision-making. Our customer base today is around 5,500 organizations, and our target market is medium- to large-sized companies in the Nordics. No one customer typically is more than around 1% of our revenue, so very low risk in the individual accounts. We combine the software packages we work with to fit different industries, and we have customers in many different industry sectors, as you see in the slide. These are the primary software providers and partners that we work with at this time. We are resellers of softwares and the selection has grown to just over 20 software components. We combine these softwares with integrations that we develop in-house. We have a revenue share partnerships with these software providers where we market and sell their software to new accounts and make customers successful in using the software over time. The business model is built on 3 revenue streams. The sales and marketing is focused on selling software together with integrations. This is sold on a subscription model where you pay as you use. This revenue stream has grown to 23% of our net revenue. Just under 2/3 of our revenue is from professional service, where we implement the software and make the customer successful in using the software over time. We also do custom development and custom integrations when needed. The third revenue stream in our business model is that, we offer our customers a single point of contact support on a recurring fixed price model. In this engagement, we can also take care of infrastructure, Internet access and IT security and such things. Exsitec is a Nordic company that started out from Linköping, Sweden. Today, we are over 600 employees with Sweden being the biggest segment. We have been successful in the last 10 years with growth, both organic and from M&A. Our EBITDA has followed our growth nicely with an exception in 2024. Exsitec runs one of the largest trainee programs in the Nordics and has been doing that with scale since 2015. We are very proud of this and almost 40% of the employees working at Exsitec started as trainees. After a record large training program in 2024, we are planning for a large program this August as well, but it will not be as extensive as last year. And normally, our trainee classes are profitable sometime in Q2, and we see the same trend with the class from 2024. So let's dive into the specifics for Q1. I will start off with the highlights and then leave the word to Carl Arnesson, our CFO, for the financial details. This is the short summary for Q1. We feel very good about performing SEK 46 million in adjusted EBITDA, which is the best result in a single quarter for Exsitec. But we also need to remind us that in 2024, parts of Easter was in Q1. And after 2 quarters with negative organic growth, we are now back at organic growth with 2%, where our overall growth was 13%. And it is really good to see our improvement in especially other Nordics with Denmark performing really well in the first quarter, also Norway improving its margins from 10% in Q1 last year to 14% this quarter. When it comes to Norway, it is almost entirely better efficiency in our professional service, which is a good step forward for us. And the last one is about order intake, where we had 15% growth in Q1 and overall a good product mix. Carl?

Thank you, Niklas. Starting off with our net sales. We reported a 13% growth in Q1 versus Q1 last year, where of the organic growth summarized to 2%. And following the slightly stronger Swedish krona, we actually delivered a bit stronger numbers, although the effect was not that material. During the quarter, we saw strong net sales performances in especially Other Nordics and in Sweden through our acquired businesses, and I will come back to the development per segment shortly. Our growth comes from almost all our revenue streams, where professional services and software are the main ones. And the overall feeling is, as mentioned previously, that still our customers tend to push decisions for minor system updates and adjustments into the future, while bigger projects such as new investments and system migrations are developing more positively. Also looking at our trend the last 12 months, we see a 3% growth year-on-year. Moving over to our adjusted EBITA. We report a 13% growth versus Q1 2024, where stronger net sales and gross profit, of course, were the main drivers behind the uplift year-on-year. However, we still feel that we can deliver even stronger performances almost across all our segments. The efficiency in especially Sweden and Norway can be improved further, and this is something that we continuously are working on. You should also bear in mind that we launched a bigger trainee program than ever in Q3 last year, something that increased our cost base year-on-year in this quarter. For the entire year and a few years back, the net recurring revenue from software has been a highlight for us. And for the last 12 months, we see a growth of 32% in this revenue stream that made up of 23% of our revenue last year, as Niklas mentioned earlier. This growth is driven by both M&A and through new and cross sales and to a certain degree, also by price increases, of course. Overall, the organic growth in the net revenue from software summarizes to approximately 2/3 of the growth for the last 12 months, while the rest comes from M&A. This is, of course, a very important contributor to our earnings, but it also is a good measurement to see that we have a strong offering and that customers continuously working to use and deploy software that we deliver to them regularly. Regarding our different segments, looking into Sweden. Sweden delivers 11% growth year-on-year in Q1, where as the organic growth was 1%. The adjusted EBITA margin did not develop in the same manner and ended up at 18% versus 23% last year, although it's an improvement versus Q4 last year. The lower margin year-on-year can mainly be explained by a lower efficiency and higher costs for the trainee program since the majority of our trainees are hired in Sweden. Regarding the efficiency, we, however, saw a gradually improving development at the end of the quarter. Norway reported a slight decline in net sales year-on-year, however, affected by a weaker Norwegian kroner. In local currency, we instead had a slightly positive growth year-on-year. Something more satisfying is that, we managed to increase our adjusted EBITA margin from 10% to 14% year-on-year, where an improvement in efficiency was the main driver behind this uplift. Even though we are happy with the improvement in Q1, we still feel that we can have even more opportunities ahead of us. An improved margin in Norway is one of our key focuses going forward as a stable and strong margin over time is important for us to build a stronger business ready for further growth. Finally, our third segment, Other Nordics, that covers our offerings in Denmark and Finland, reported a very strong growth of 88% year-on-year, where 33% was organic. The growth year-on-year is, of course, boosted by the acquisitions we made last year of the customer base from ECIT in Denmark, but also due to good numbers from M-flow in Finland. Especially the professional services business in Denmark developed extremely strong during the quarter, and the acquired customer base was, to some extent, previously given unsufficient attention. So we have been able to serve these customers well during Q1, and we also see further potential in the coming quarters. This has, of course, been an extremely strong quarter, but we expect the development to normalize a bit over time. And as a result from these strong sales numbers, the EBITA margin in this segment also developed accordingly. And by that, I hand over to you again, Niklas.

Thank you, Carl. I will continue with a short update on the market conditions and our priorities for 2025. Our existing customers are still passive, and we see no new trend in investing more in existing systems and solution. We do not see a trend towards churn on the other hand, so our customers are still using the solutions, but the small things like adding a new report or change something in the ERP is not on the same level as a couple of years ago. When it comes to new customers, it's quite the same with the trend that the sales cycles are longer. Our potential customer takes longer time before making a decision to invest in new IT solutions. But on a positive note, we have had a great increase in qualified leads, a growth on 50% in Q1 compared to Q1 in 2024. So we are confident that we have relevant systems and solutions for customers in our target group. And lastly, our order intake is up 15% compared to Q1 2024, which is good, and we have started Q2 strong with 2 major deals in public offerings that we -- that will have most effect later this year and in 2026. So for our business priorities in 2025, we have these. Sales execution is important for us to be able to continue with organic growth. We increased our sales force in 2024, and we can see some results in our ability to generate leads, which was up 50% compared to Q1 2024. And also, as I mentioned, our order intake is 15% up compared to Q1 2024. So we feel pretty optimistic about our sales force in general. The second one is about operational excellence. We still see room for improvement when it comes to efficiency in our professional service, and we continue to work with operational excellence and higher efficiency in 2025. An important task for us, here in 2025, is to integrate our acquired companies into Exsitec as smoothly and quickly as possible. BrightCom in Sweden, ECIT in Denmark and M-flow in Finland were all acquired in 2024, and we see some good contribution in the first quarter of 2025. But we will continue to work with M&A, building pipe and keep looking for selective acquisitions when we have the opportunity. This is a reminder about our financial goals that we updated in the second quarter of 2024. We have a goal to increase our net sales by at least 15% per year over time, and our performance target is to increase our EBITDA per share by at least 15% per year over time as well. Our stability measures is that, our net debt must not exceed 2x our EBITDA. And the last one is that, our policy is to distribute 20% to 40% of the profit after tax. And this concludes the presentation. Are there any questions for us, Hampus?

Yes. We have a question from Raymond at Nordea.

Can you hear me?

Yes.

Perfect. So a couple of questions from me. I'll ask them one by one. First one, just on the lower margin in Sweden. I assume that some of it is due to the BrightCom acquisition. And I was just wondering how does the margin compare in BrightCom compared to sort of Exsitec in Sweden.

Yes. Well, in general, it's not that BrightCom is the one affecting our margins. It's actually that our professional service is underperforming and that our utilization rate is 3% to 4% down in Sweden. So that's the big part why our margins are 18% compared to last year in Q1 that was 23%. So for the BrightCom part, we are -- I think that we are on the right track, and we see that the Microsoft offering that BrightCom brought in is picking up traction on the market, and we do bring in new customers every month. So I think that's really positive for us. And we also do see some collaborations between our units in Exsitec. As you all know, we already worked with Microsoft before, and we are working with Power BI, for example. So I think that will be something really good for us to be able to offer Power BI to the customers from BrightCom.

Got it. That makes sense. And you write that the utilization improved towards the end of the quarter. Just trying to understand, is that -- is utilization still below sort of last year going into Q2, but you've closed the gap? Or is it just sort of better utilization relative to how it was starting the quarter? Yes, any flavor on that.

Yes. No, it's better than we started out the quarter. And usually, January is not the best month for us with some off-time for the professional service. But it's -- if we talk about Sweden -- because it varies between our different segments. In Sweden, we are down 3% to 4% in utilization rate compared to last year in Q1. But in Norway, on the other hand, we are up. So -- and also in Denmark, we are up a lot, as you see on the numbers from Other Nordics. So it varies a bit between the segments that we have. But Sweden is our biggest segment, and we have a slightly positive trend towards the end of the quarter.

Got it. And then, Niklas, since you became CEO, in what areas sort of have you spent most of your time? And where do you think you get most return for your time going forward? Just trying to understand which levers in the organization that you see are most worthwhile to pull here.

Yes. For me, it's been a period of time just to get to know all of our units and segments. So I don't think it's any specific really like that. So -- but, of course, Norway is pretty similar from the unit that I ran before, the ERP department. So I spend a lot of time with Norway, of course. But for now, it's -- and for me, it's been a lot of just to get to know the organization and to get to know the different segments and units all over Exsitec.

And then we have next question is from Ramil at Danske Bank.

Can you hear me?

Yes.

Amazing. Apologies beforehand if there's any audio leakage here. I'm on my AirPods, so you know. But I just want to start off on a question on the Norway margins. I mean, clearly, the share of revenues coming from software and infrastructure support is much, much higher than it is in Sweden. And you don't seem completely satisfied with the 14% you're doing in this quarter. So could you shed some light on sort of what, call it, steady-state margins would be in the Norwegian business, where would you be happy with the margins here?

Well, that's a good question. I think the focus in Norway has been on improving our margins. And we think that this is a good step forward if we compare to Q1 in 2024. But the biggest part for us and the most room for improvement is in our professional service, and that's where we are focusing right now to higher our efficiency. And I think it's -- we should be able to come closer to the Swedish margins, but probably it will take time. It's not done in just a couple of quarters. So -- but that's what we're aiming for to keep increasing our margins before going into growth. So -- but it's almost entirely in the professional service that we see room for improvement in Norway.

But is it -- given the higher share of revenues coming from margin accretive revenue streams, is it fair to assume that the utilization rate in Norway is materially below Swedish levels on the professional services side?

Yes, it is lower in Norway compared to Sweden. That's right. Yes. And that's something that we would like to increase, of course. And that's the focus and will be for the entire of 2025.

Okay. Okay. But it seems like it's materially below Swedish levels, which are -- Swedish levels are subpar given the market environment we're in and then Norwegian utilization rates are materially below Swedish subpar levels. Is that a fair assessment?

Yes. It's lower than Sweden, it is, but we don't go out with the specific numbers. But you are right, it's lower in Norway compared to Sweden. It is. And that's the main focus for our Norwegian units to increase those levels.

Okay. That's very clear. And on that topic, headcount is down by 20 roughly quarter-over-quarter, as you alluded to in the Q4 report as well that you were going to adjust the organization somewhat. But utilization rate in Sweden is down 3, 4 percentage points year-over-year. Market is picking up somewhat towards the end of the quarter. And then you indicate sort of that you will do a fairly big training program this year. So could you just even sort of those things out? Is there more slack to shave in the organization before the trainee program? Or are you happy with current employment levels and then the trainee program comes on top of that? And maybe as a follow-on, what the size, the magnitude and the scope of the trainee program, what variables would have to change for that to be, say, above 100 or below 50, for instance?

Well, there's a couple of things in that when it comes to our trainee programs in the future. First of all, our trainee program starting this August in 2025, they are not meant to be contributing in the fall. They will do it in 2026 and 2027. So we are building for future growth. But on the other hand, we need to be careful and really look for signs in the markets for -- when it comes to sales and order intake. But as we see now, we did a really good quarter in Q4 2024. So we had an increase in order intake, and we also had an increase in order intake in this quarter, and we started out Q2 good as well. So we're feeling pretty optimistic about the sales. But then also, we need to keep in mind about the employee turnover rate, and that was significantly down last year from somewhere around May and June, and then it dropped down, and we still are on those levels. So that will also be a factor when we look at hiring new people. But as I said in the presentation, we will not do as an extensive program as we did last year. That was a record large program for us. So we'll probably do a more normal program for us if that makes sense.

It does. It does. Okay. That's very clear. And then maybe more short term sort of from the Easter impact here. It seems like it will have a negative impact year-over-year in Q2, but then trainee absorption improves quarter-over-quarter. So how should we think of sort of short-term margin outlook here given the 2 sort of opposing trends here?

Yes, Carl here, I can elaborate a bit on that one. When it comes to the calendar effect in Q1, it's a bit difficult to draw any clear conclusions. Last year, we had an extra day in February and 1 extra in -- 1 less in March. However, the Easter was separated between Q1 and Q2 last year. But it's a bit difficult to, as I said, draw any clear conclusions. It's also due to when people tend to take out their vacation and so on. So -- but we don't see that the effect had a significant impact on our net sales in Q1. And so, over time, we don't see that as a significant impact if you compare Q1 and Q2.

That's very clear, Carl. And then a final question or maybe 2, if I may, on the topic of sort of pent-up professional services demand in Denmark following the acquisition of the big customer base. First off, could you sort of put that into context? How -- what kind of magnitude are we talking about? And how will that fade in the coming few quarters here? And then secondly, could you talk a little bit about the multiples you tend to pay for these customer base acquisitions, going into the acquisition? And then if you were to add this pent-up demand on top of professional services, what would the multiple decrease by?

So I can start off with the development for the ECIT acquisition. So we did that in the fall of 2024. And we saw that the customer base, roughly around 100 customers in Denmark, they were a bit underserved and it was an accumulated demand for professional service and consulting services. So we were able to bring in those customers. And then we had a team for Exsitec Denmark that already worked with Visma Business. This was 100 customers using Visma Business. So we had capacity in the Danish organizations. So we were able to start working with them. So that was a really good timing and a match for us. So -- and we do expect to have growth in Denmark all year since we brought in 100 customers and since we did the acquisition. So -- but going forward from that, we still need to have order intake and new sales to be able to continue with good growth. But I think it's a stable ground to stand on in Denmark now. We reach more of a critical mass when it comes to number of customers and number of employees. So that's a good progress for us.

Yes. And Hampus here, regarding the multiples on the customer base, we try to keep them -- they are, of course, lower than when you buy a company, but it's also difficult to say exactly what multiple we're paying, but we try to pay somewhere between 3 and 5 depending on the customer base that we're buying and how much recurring revenue there are and so forth. So -- but somewhere between there, we do try to keep the multiples.

And is that on a trailing basis, 3 to 5, Hampus, and then you get potential pent-up demand for professional services on top? Or is that after the professional services?

No, that's pre -- that's how the business unit is running before we buy it. So when we acquire it, we do have some own calculations on how much we can get out of the customer base. So the multiples. If you're going -- if you're looking forward, the multiples will be somewhat lower. But usually -- the one who sells the business usually knows the best about the business. So they know if there's a pent-up demand as well. So they will try to negotiate and say that, but you can get so much out of it. But yes, it's somewhat lower if you look at our own prognosis. And the next question is from Jacob at Redeye.

Yes. Can you hear me?

Yes.

Perfect. I wanted to start with a question about M-flow. Is it possible to put some color on that acquisition's development during the quarter? Like I know you can't give any specific like revenue figures maybe, but for example, how many of the customers that M-flow had contracted when you acquired them is now like live and up and running with Medius and generating software revenue?

Yes. So first of all, I think M-flow, that's more of a margin contributor rather than a growth contributor if you compare it to other units or segments since the model there is that, it's a high rate of recurring revenue. But as we see your question about the customers, when we acquired M-flow, most of them customers were already live with Medius. And usually, projects with Medius is not that long, maybe 3 to 6 months or something like that. So we are continuously implementing the new solution for the customers. And since we acquired M-flow, we have brought in new customers. And I think that as a reminder that we actually do the professional service from the Swedish segment when implementing systems in Finland. So we have the sales department in Finland in M-flow, and they are selling to new customers, but then we do the professional service in Sweden. So I think that will affect that we do not have that big growth in Finland as isolated segment.

Yes, I understand. And what are you thinking about your consulting organization there? Are you like -- are you planning to establish a local organization there for professional services? Or will you keep on serving those Medius customers from Sweden?

Yes. For now, we will do it from Sweden. But in the future, we will probably have more of a footprint in Finland. But when we will do that, I do not know that.

Got it. Understandable. And last question about M-flow is like, can you say something about how new customer intake for M-flow specifically has developed since you acquired them below, above or in line with your expectations? Like how are they performing -- this sales organization performing?

Yes. We are a bit behind from our expectations. So we started off pretty slow, but since winter and starting Q1, I think we are on a better track. So it's a bit behind from what we thought from the beginning, but on the right track in general.

Perfect. And moving on to another question I have regarding BrightCom. Is it possible to say anything about how large share of BrightCom's revenue that is recurring revenue from software? Is it above, below or in line with the group average of 23%, 24%?

Yes. I would say slightly higher than Sweden in general or Exsitec as a whole, slightly higher share of recurring revenues.

Okay. And last question I have is about Norway. Software revenue in Norway year-over-year is flat. And you state that the overall group has grown software revenue organically by some, yes, 1/3 of 32%, so maybe 10%, 11%, something like that. Like why is Norway software revenue lagging behind? Is it like related to the Norwegian kroner or currency exchanges here? Or is it something else?

I think it has a bit to do with the currency, but not that much. So in Norway, they are -- we have this new system called Business NXT from Visma that is launched in Sweden and Denmark last year, and Norway was a bit ahead of that. And they are ahead of the migration game going from on-premise system with Visma Business and Visma Global to Business NXT. But as we do that, we do see that some of the customers, the small customers that has been using Visma Business or Visma Global for a really long time, they are probably too small to actually use those systems. So when they have the option to migrate to Business NXT, they might go for smaller, easier systems. So we do see a bit of a churn in Norway. So that has to do a bit with that -- it's flat when it comes to the recurring revenue.

Yes. And also just to -- in Q1 last year, we actually had a bonus payment from Visma, which has contributed to the recurring revenue, which we didn't have last year -- this year, I mean. They did have a different reseller program that time. So there was a bonus payment, which we got in Q1. So that -- so the effect is actually -- we do have growth if you discount from that. And that was the last question, and that concludes our presentation. Thank you for listening in.