Karnov Group AB (publ) (KAR) Earnings Call Transcript & Summary

Welcome to the Karnov Group Q3 2026 Report Presentation. [Operator Instructions] Now, I will hand the conference over to CEO, Pontus Bodelsson; and CFO, Magnus Hansson. Please go ahead.

Welcome, everyone, to Karnov Group's earnings conference, where we will present the outcome of the third quarter of 2026. Please go to Slide 2. I'm Pontus Bodelsson, President and CEO of the company. With me, I have our CFO, Magnus Hansson; and our Head of Investor Relations, Erik Berggren. Magnus and I will present the outcome of the quarter using a few slides, and then we'll open up for questions. With that said, let's get started with the presentation, and please go to Slide 3. In the third quarter, the core Online Legal growth was 9%, and the adjusted EBITA margin improved to 27%. AI uplifts are the primary growth driver across all geographies. In Denmark, Sweden and Spain, where Karnov holds a market-leading position, we continue to achieve strong results. Our new workflow solution launched at the end of June provides customers local legal knowledge and powerful AI in an integrated system. The new solution has been well received and sales exceed our expectations. The organic growth was 3%, driven by online legal, while offline sales, primarily books and legal training were weak in the third quarter. Leverage was 2.0x, well below our financial target. During Q3, we have repurchased shares for SEK 22 million. Please go to Slide 4. During Q3, the double-digit growth in Region North is sustained, and we see accelerated growth trajectory in Online Legal in Region South, thanks to our newly launched AI platform in the region. Customer satisfaction is on a high level and the retention rate is on the same high level as previous years. We continuously upgrade customers to our AI-supported solutions and the number of users in all customer segments and the monthly usage is increasing quarter-by-quarter. In Q3, Online Legal grew 9%, driven by our legal businesses in Region North, which grew 11% and Region South, which grew 8%. Our market-leading Spanish business is accelerating growth, thanks to a stronger product portfolio and deep expert-authored local content. At the end of June, we launched our new AI-driven workflow solution across all our markets, an important milestone that extends Karnov's position in the legal landscape. Our #1 market positions in 3 European countries are built on proprietary legal content authored by 7,000 recognized legal experts. For more than 150 years, Karnov's content has been the foundation for legal work in its core markets. That trusted content now becomes seamlessly embedded across the entire cycle of our customers' legal work. We deepened our partnership with customers from a trusted knowledge source into their home turf for legal work. Initial sales have exceeded expectations, with Denmark being the fastest adopting market. We will launch more customer value in Q4. AI adoption is a proven, repeatable playbook for Karnov, accelerating core Online Legal growth across geographies, with EBITDA growth consistently outgrowing net sales. Since the launch of our AI solution, the adjusted EBITDA has grown 9x faster than net sales. The Board's evaluation done together with our financial adviser is proceeding. It runs alongside the execution of our existing strategy. Next slide, please. With that said, let's zoom out for a second and look at the market landscape for legal information and technology solutions. Karnov has evolved from a leading Scandinavian knowledge provider into a leading European provider of mission-critical legal knowledge and workflow solutions. Our proprietary content is maintained, updated and established by more than 7,000 authoritative legal experts. Thanks to our ever-evolving proprietary content base that is deeply integrated in the workflow, we stand strong in the legal market landscape in transformation. More than 75% of our net sales come from market-leading positions. Our proprietary content powers our AI solutions, enabling cross-sell into our 400,000 user base and providing a strong competitive advantage. Next slide, please. In the civil law geographies where Karnov operates, the legal system is based on 4 different types of legal sources: legislation, preparatory works, case law and legal doctrine. Karnov's proprietary legal content is the doctrine shaping the legal interpretation. For example, in 2025, close to 50% of the decisions made by the Supreme Court in Sweden referred to Karnov's content. This is different from common law markets such as U.K. and the U.S., where case law is more important. Next slide, please. This slide gets at the core of the value we provide customers. It starts with our extensive market reach, over 40,000 customers across our core markets. That scale gives us access to a large engaged audience, which in turn makes it attractive for leading legal experts, Supreme Court judges, professors and senior partners to contribute their work through Karnov. Now, we have more than 7,000 experts. And for example, in Sweden, around 13% of our authors are current or former judges. That expert contribution deepens our proprietary content, which strengthens our offering and attract even more users and authors. This content, the doctrine is the kind of authority that only comes from the legal community itself, recognizing something as a definitive source. On the right, you see a few of our experts. In Sweden, we have close to 1,000 active experts; in Denmark, nearly 400; in Spain through Aranzadi LA LEY, around 4,000 experts; and in France through Lamy Liaisons, 1,300 experts. That's the interpretive layer. The doctrine that sits on top of statutes and case law in the civil law system. Next slide, please. Civil law systems place significant weight on accumulated legal doctrine and commentary in shaping how the law is interpreted. That means historical analysis matters just as much as current analysis. A commentary from 20 years ago can still be the relevant precedent for how a case is decided today. To be considered legal doctrine in these markets and to be treated as such by courts and the legal profession, you need coverage of historical proprietary content, not just what's been produced recently. Next slide, please. Built on a strong foundation of legal expertise, Karnov's deep proprietary content provides a distinct competitive advantage in legal AI. For more than 150 years, we have been the partner legal professionals rely on for legal knowledge and doctrine. We've sold AI-powered solutions for the past 2 years with great success. Let me pull this together and summarize our value proposition in 3 pieces. The first is proprietary data and content. This is Karnov's owned intellectual property, and it grows by 60,000 new reviewed or updated editorial pieces every year. The second component is what that content actually does. It's the doctrine the legal system runs on. It links statutes and case law with expert interpretation and in doing so, makes complex law decision-ready for practitioners. Close to 50% of the Swedish Supreme Court cases in 2025 cited Karnov content. The third component is what makes this defensible over time. We have more than 200 years of accumulated legal content and over 19 million cases collected. And importantly, roughly 50% of the times a case is pulled up by a user, it's a document from 5 or more years ago. Next slide, please. As research and workflow converge with AI, the winner will be whoever offers both seamlessly. That is what Karnov now offers all professionals deep local proprietary content with best-in-class legal workflow tools in one integrated system. We will launch more value to our customers in Q4. Next slide, please. In Sweden and Denmark, we introduced AI 2 years ago. Since then, core Online Legal growth has accelerated to double digits and importantly, sustained that level. In Spain and France, we launched AI more recently, reaching the same customer value as in the Nordics in March this year. And what we're seeing in the first few quarters in Spain and France looks like the same early acceleration curve we saw in the Nordics at the equivalent stage. Customer retention levels continue to be at high levels while uplifting customers to AI solutions with strong customer satisfaction. The customer journey is in simple terms, consisting of 3 products. The core legal databases have a price index of 100; the AI Assistant, a price index of 130 and the workflow layer, a price index of 200. So, we have introduced a customer journey that can double the revenue per user. Next slide, please. And by this, I now hand over the floor to our CFO, Magnus Hansson. He will tell us more about the financial performance in the third quarter.

Thank you, Pontus. Please go to next slide. In the third quarter, net sales amounted to SEK 637 million, an increase of 3% adjusted for divestments. Online Legal grew 9%, driven by continued AI uplifts, increased number of users and annual price increases. Offline sales, mainly books and legal training, declined with SEK 22 million. Next slide, please. Online Legal is driving the group's growth. In the third quarter, Online Legal grew SEK 39 million compared to last year. Offline sales declined with SEK 22 million, partly offsetting the growth. Next slide, please. Over the past 2 years, Online Legal has grown 11%. Last 12 months, growth has accelerated on all markets, driven by AI uplifts. Sweden has been the fastest-growing market, followed by Denmark and Spain. Next slide, please. The adjusted EBITA amounted to SEK 173 million in the third quarter. This corresponds to an adjusted EBITA margin of 27%, which is an improvement of 1 percentage point. The improvement is driven by operational leverage and beneficial product mix. The cost base includes expenses relating to the launch of the workflow solution. Next slide, please. AI adoption in online -- sorry, AI adoption in Online Legal is improving the group's margins. Adjusted EBITDA has increased 22% since Q4 of 2024 last 12 months, meaning adjusted EBITDA has grown 9x faster than net sales since the launch of AI solutions. The cost saving programs has generated annual run-rate synergies of SEK 228 million, and they will be completed by the end of 2026. This is in line with our initial plans. Next slide, please. In Q3, net sales amounted to SEK 332 million in Region North. Online Legal grew by 11%, and the organic growth was 4%. The Online Legal growth is due to a strengthened market position as we upsell and attract new customers, especially in the public sector in Sweden. During the quarter, we have continued to upgrade customers in Region North to our AI solutions. The new workflow solution has got sales traction, especially in Denmark. In Q3, we have a slightly larger decline in offline sales than what we've seen over the last years as we've had one-off sales of school curriculums in Sweden in Q3 of 2025 of SEK 4 million. The effect on the organic growth is approximately 1 percentage point in Q3. Adjusted EBITA was SEK 162 million. This is an increase of SEK 25 million compared to last year. The adjusted EBITA margin amounted to 49%. The improvement is due to operational leverage from higher net sales and a lower cost base. Next slide, please. In Region North, the online sales accounted for 92% of the net sales in the quarter. Please note the divestment of our EHS business. Subscription-based sales represent 95% of sales in the quarter. Next slide, please. In Q3, Online Legal grew by 11%. The growth is driven by AI sales, pricing and additional seats. Next slide, please, which is the Region South segment. Net sales in Region South were SEK 305 million in the quarter. Online Legal grew by 8%, driven by both Spain and France, and the organic growth was 1%. Our Spanish business continues its positive momentum. The French business had solid performance in subscription-based online sales, while offline sales continued to be weak. The adjusted EBITA margin was 14% in the third quarter. The Spanish business had a meaningful margin improvement, thanks to growth and synergies, while the French business had margins below our ambitions. Depreciations have increased by SEK 4 million, mainly due to the completed development projects. Next slide, please. In Region South, the online sales increased by 4% compared to Q3 of last year and accounted for approximately 88% of net sales in the quarter. Next slide, please. Online Legal grew by 8% in Region South. There is a minor timing effect between Q2 and Q3 in Online Legal. In Sweden and Denmark, we introduced AI 2 years ago. Since then, Online Legal growth has accelerated to double digit and importantly, sustained that level. In Spain and France, we launched our Group AI platform more recently in Q1 of this year, and we now see steady improvement in Online Legal growth. Next slide, please. Breaking down the adjusted EBITA margin in Region South from country level. We see strong margins improvement in Spain and weak margins in France. The Spanish business had an adjusted EBITA margin of 22%, well above our medium-term target of 16%, while the French business had a margin of 5% in Q3. Next slide, please, which presents the segment group functions. Expenses in Q3 were SEK 31 million. As mentioned earlier, Q3 includes expenses primarily for consultancies in relation to the launch of our AI workflow solution as well as additional marketing expenses. Next slide, please. In Q3, the adjusted free cash flow was negative SEK 29 million. The cash flow from operating expenses increased by SEK 39 million, driven by higher operating profit, while CapEx increased compared to Q3 of last year. During the quarter, we have allocated SEK 22 million to repurchasing shares. Next slide, please. Adjusted EBITA has grown from SEK 513 million to SEK 673 million over the last 2 years. Adjusted EBITA per share have increased 46% over the same period. This development is driven by 2 factors. First, operational leverage. We launched our AI solutions in Online Legal at the end of Q3 of 2024, and we've had 2 efficiency programs running during this period. Since then, adjusted EBITA has grown 30%. Second, share buybacks. We have repurchased approximately 12% of our outstanding shares since the beginning of the year. As a consequence, adjusted EBITA per share has grown faster than adjusted EBITA. Combining investments in AI and operational leverage with buybacks is a reflection of our capital allocation strategy. We're pleased with this development, and it's a good illustration of how we think about creating value for our shareholders. I'm now handing over to Pontus again, who will present our last slides.

Thank you, Magnus. Please switch to Slide 28. I would like you to carry the following notes from this presentation. Customer retention levels continue to be at high levels while uplifting customers through AI solutions with strong customer satisfaction. Karnov continues to grow in its core Online Legal offering, driven by strong demand for our services. Our mission-critical proprietary content is a prerequisite for trustworthy legal AI. Online Legal growth accelerated to 9%, thanks to sustained double-digit growth in Region North and accelerated growth in Region South. AI adoption is a proven, repeatable playbook for Karnov, accelerating core Online Legal growth across geographies, with EBITDA growth consistently outgrowing net sales. Next slide, please. And by this, I'll end our presentation, and we are now ready to take questions. So, I'll hand over the conference again to our host.

[Operator Instructions] The next question comes from Thomas Nilsson from Nordea.

I'm very interested to hear what you are thinking about the outlook for organic growth in Region South now that we see this acceleration in AI sales also in Region South. And also a second question could be, if you could give some examples to workflow tools that have found success with your client base.

Thank you for the questions. Well, first of all, let me point out, we didn't give any forecast. So that's important. But of course, we can look at what happened historically in Sweden and Denmark when we launched the AI services. And as I mentioned, I mean, we are now since the last week of March on par with the customer value in Spain and France that we launched in Sweden and Denmark almost 2 years ago. And if we compare or see and try to learn from what we saw in Sweden and Denmark, the acceleration we've seen in this quarter is somewhat in the same direction from what we saw in Sweden and Denmark 18 months ago. So hopefully, it will follow the same track. However, it's still to be seen, of course. On top of that, which is, I would say, even more interesting to see and to try to understand going forward is, of course, the launch of the workflow products, referring to your second question because this has actually opened up a new door. This is a part of the market where Karnov hasn't been before. So it's a new part. There are other companies offering workflow tools. The thing that makes Karnov solution, services in workflow tools stand out is the fact that we combine the content within the workflow tools. So, there's a seamless way for a customer to work through a specific matter, meaning that you don't have to copy and paste between a content provider and a workflow provider. So, I would say that is the main positive thing with our workflow solutions. We started out and created this for midsized law firms. However, we've already seen that also other kinds of law firms, actually also customers within the public sector has been enthusiastic and would like to try out this service. So, I would say, basically, it's the combination to answer directly your second question, it's a unique proposition by having a seamless combination of a workflow tool with unique expert-authored content. That's what stands out.

[Operator Instructions] The next question comes from Martin Wahlstrom from SB1 Markets.

Just to start off, I wanted just to get some clarification on the difference between like Online Legal and other online, especially in South. It seems like the other online part is shrinking a bit, kind of the outlook there and what's the driver behind that?

Yes. Thank you. Yes, you're absolutely right. There is parts of online that isn't what we refer to Online Legal. That would be typical software and other services that is not entirely the core. And what we see in the numbers is that -- and also I would like to add, there is a transactional element to the online business in Region South as well. So, one thing that is dragging that development a little bit is the legal training in France, which is partly online and partly offline. So, that would be the main drag in online development in Region South.

Yes. Got it. And outlook-wise, are you expecting that to reverse or ease up here going forward?

Well, we have talked about our training business in France for a few quarters by now. We don't see any major shifts in how the training business in France is performing. We are looking forward to 2027 with new elections, meaning that we can start passing new laws in France as well, and that will be helpful. The other structural difficulty we've had this year is that a large customer group within the training business in France are workers' councils. And they are elected every 3 or 4 years. And this year is a large election year for the workers' council. And hopefully, then, they will come back to us next year. So we don't -- even though we work really hard in the training business in France to make sure that we have training that suits our customers, this is a market trend. So, we can't change it all by ourselves. We need some help, for example, with new laws and also with the workers' councils coming back to us.

Yes. Got it. And then relating to the increase in CapEx year-over-year, I guess that's related to product development partly. Is there anything specific we should keep in mind here? Is it kind of within reason for the typical fluctuations?

Yes, no, we've talked about 6% to 8% of net sales for the last couple of years. And up until Q2, Q3, we've been on the low side of that. We've been closer to 6% and 8%. Now, we've increased CapEx, not least in our flow products a little bit. So, I think we are at around 7% of net sales in the quarter. So it's still sort of within the range that we've talked about before, but we have increased pace a little bit, partly in AI, but mostly in the flow products.

Yes. Got it. And then another question on kind of AI upsell in South. I noticed Legora has been pushing quite hard on its content side here in the past few months, along with Harvey, of course, and also rolling out across Europe. Just kind of wondering the dynamic there. Do you meet them in customer dialogues? Or are they making it harder to drive upsell? Or are they kind of helping you with market awareness, if there's any dynamic there?

I think I shouldn't comment on colleagues in the industry. But I think it's important to underline the difference between the U.S. and Europe. If I understood it correctly, there is a content drive by AI-generated content in the U.S. And that is, I would say, under very specific circumstances because we are -- in the U.S. and U.K., we are talking about the common law system. That's another system, and it's based on case law to a much greater extent than the European law, which obviously is the civil law market. So in the civil law market, there's a much bigger dependency on the doctrine, meaning commentary. And the commentary doesn't turn into doctrine immediately because you need to have the best experts that are just one best expert in every legal field. And then you have to give them time to write. And on top of that, you need to have the legal system, specifically, of course, the courts with the justice -- judges to be able to refer to that content to create it into doctrine. That's a different system from what they have in the U.S. and in the U.K. So, I would say that if we were to launch in the U.S., which is not part of our plans, that would be a different thing. But as long as we stay in the civil law system in Europe, we are dependent, relying and building everything we do up on this doctrine, which is really unique. So, that's the reason, our raison d'etre on that, why we could exist in Europe and thrive and expand. So it's all because of the difference between the common law system and the civil law system.

Yes. Super. And just one final question, which is more of a clarification. The minor timing effect of SEK 3 million between Q2 and Q3, that is then boosting Q3 and kind of...

Yes. Exactly.