Knowit AB (publ) (KNOW) Earnings Call Transcript & Summary

Good morning, everyone. I would like to welcome you all to the Knowit Interim Report January to September 2022. My name is Breeka, and I'll be your event specialist operating today's event. [Operator Instructions] I would now like to hand the call over to our host to begin, Per Wallentin, the CEO of Knowit to begin. So Per, please go ahead when you are ready.

Thank you, and warm welcome to this presentation of Knowit's Q3 Report 2022. And take the next slide please. Today I will present together with Marie Bjorklund, our CFO and we can take the next slide please. First, I would like to take you through some operational highlights during the third quarter. We continued to see good demand for the digitalization services and I'm pleased to see that we have had a strong organic growth in the quarter. Our business areas experienced and connectivity continued to perform well, increased revenue and margins. Overall, we have a negative margin development, mainly explained by weaker performance with an Insight in Finland. We see that Finnish customers in this segment are a bit more reluctant to take on to longer assignments and to get people into new projects. And this is mainly manifested to our performance in the newly acquired company Marketing Clinic this quarter, but long term we see good potential in our management consulting business both in Finland and in other markets. And we are pleased to note that the net recruitment trend has been really positive this quarter with almost 200 new employees. Following that, we'll start several new trainee programs, which means that a lot of these people are young talents and joining within the quarter, within different areas, for example, secure solutions, etc., we can take the next slide please. Our sustainability goals, they are important -- an important tool to steer our everyday work to ensure that we always strive to participate in the transition to sustainable and digital society. These goals is a combination with financial goals and will ensure that Knowit steer towards long-term profitable and sustainable growth. I will highlight one example for this quarter and it's the development of a new process and method to analyze data from a Finnish company, Lindstrom Group. Lindstrom offer rental of textiles in the form of working close to more than 200,000 customers worldwide. Each garments have an RFID tag, meaning that data about its life cycle can be collected and analyzed. And by 2025, Lindstrom will recycle 100% of its textiles waste to efficiently and thanks to that efficiently analyze the data and through this project we contribute to both sustainable -- the goal connected to sustainable consumption and production, as well as climate action, we can take the next slide please. And now will go into more detail connected to our business areas. Our largest area, Solutions, reports a net sales of SEK 895 million for the third quarter. That corresponds to around [ 70% ] growth including acquired entities. The margin was 8.1% and that was impacted by pent up needs for physical meetings and travels. We have had high net recruitment in the quarter and we also took quite a few new frame agreements, which made a need for subcontractors in some bigger projects, mainly in Norway. And we see particularly strong growth and performance in Norway and in Finland. Next slide please. Experience reported sales of SEK 339 million in the quarter. That's an increase of around [ 18% ] including acquired entities, the margin was 6.3% and we have now reached milestone of 1,000 employees in the Experience area and that's a really good foundation for further growth. We can take the next slide please. And our business area Connectivity reporting SEK 248 million in the quarter growing with almost 27% in existing business, margin improvement to 11.7%, really strong result. We see high demands for our competence in both Poland and in Sweden. And Connectivity, as you know, strengthen our offers to R&D intense industries such as tech telco and automotive. And for example in Q3 we received a certificate connected to A-SPICE in for development in the software automotive industry which been really important for us, so we will continue to grow in that area as well. Next slide please. Our business area Insight reported sales of around SEK 136 million, that was somewhat up from the year before, but we see a negative result in the area primarily consequence of weaker than expected performance in Finland, particularly in Marketing Clinic that was acquired earlier this year, but this year we have also heavily invested or are heavily investing to gain position as one of the market leaders in management consulting connected to digitalization in the Nordics. We do that also by the acquisition of Ascend and Ionic that strengthens our offers even further. We see an high demand for cybersecurity, as well as profitability analysis and cash flow optimization project. So there is a lot of interesting possibilities to come in Insight as well. And with that, I will hand over to you Marie. We can take the next slide please and hand over to you Marie and you will elaborate a little bit in more in detailed connect to the financials.

Thank you, Per. Taking a look at Knowit, the Group as a whole, we can see that we delivered sales of approximately SEK 1.5 billion, compared to around SEK 1.2 billion -- next slide please. Okay. I'm going to go again here, when we're looking at Knowit as a whole, we can see that we delivered sales of around SEK 1.5 billion compared to around SEK 1.2 billion reported for the same quarter in 2021. This contributes to growth of 28%, which was impacted of the acquisitions. The growth was close to 15% when comparing Knowit now and including the acquired units a year ago. Adjusted for currency, that growth was 11%. EBITA adjusted for acquisition and integration costs amounted to SEK 94.5 million for the quarter, which is a decrease of 10.3%. Our adjusted EBITA margin amounted to 6.2% in the quarter and the margin decrease is mainly due to reluctance among some customers especially in Finland and especially in the business area of Insight. The recent acquisition of Marketing Clinic has faced challenges and the margin decrease is also due to cost for net recruitment of the 188 employees that Per mentioned and that's an investment we made for the years to come. During the quarter, same as last quarter, we see an increase of cost for travel and physical meetings. We only have that to lower extent last year and we are experiencing a fragmented picture where Insight faces some reluctance in Finland, while solutions for example shows a strong growth in the Finnish market. Next slide please. Looking at the revenue and growth development, we are happy to present an another quarter with a good growth and including the third quarter, our adjusted EBITA for the latest 12 months is SEK 610 million and we have revenues of SEK 6.4 billion with an EBITA margin of 9.5%. Next slide please. We continue to enjoy solid financial position and a strong balance sheet and our net debt at the end of the quarter amounted to SEK 828 million and increased compared to previous quarter following in acquisition activities in the past year. This corresponds to a net debt to EBITDA ratio of around 1.1, which is well within our financial target. In the second quarter, we extended our credit facility with Nordea and we now have access to a little more than SEK 1 billion in total, which is good for us and good for our future investment activities. Next slide please. Knowit is well positioned to manage a possible downturn well. We believe our largest segment is the public sector and the public sector tend to be stable even in worse financial times. As you can see, nearly 4% of our revenues come from the segment. We also see that projects that are business critical to the digital transition remain and the fact that development resources are scarce speaks in favor of consultancy's like Knowit. Another trend is projects that support the transition to a sustainable society and this is an important and prioritized area for Knowit. And with that I hand over to you, Per. Next slide please.

Thank you, Marie. Well to summarize, we are delighted to present a stable quarter, with high activity in all areas. We see high demand for our services across the Nordic region with some, let's say, [Technical difficulty] on geography and segment. Insight in Finland as we talked about has performed weak and weaker than expected, others are really performing really well. We had a successful quarter in terms of net recruitment, but experienced that it takes somewhat a little longer time to get this consultant into new projects. This is mainly due to higher share of young talents. We see that actually every third quarter but especially now when we have such a big amount of people coming into the company. We have invested heavily in growth the past couple of years and that have created a solid platform to continue to grow from particularly important that we have a strong hold as Marie mentioned in the public sector that is stable and the stable sector in the economy further. And with this, I think that we are really well positioned and look forward to new opportunities ahead. And with that, I would like to open up for questions.

We take the next slide.

We can take the next slide, please. Yes. Q&A if we have any questions.

[Operator Instructions]

We'll start with some, if there is any, live questions.

We have the first question on the line from Daniel Djurberg of Handelsbanken.

Daniel Djurberg, Handelsbanken. Yes, starting off with Solutions. The EBITA margin was down some 200 basis points year-over-year, you explained this by cost of travel, meetings and high net recruiting and use of sub-consultants in Norway has key reasons. Can you give us a ballpark on how much this impacted if it was similar Part 130, so if it was something of this that was impacting more than the other, for example, the sub-consultants in Norway. And if we should see this -- most of these things being of structural implication that, i.e., that we should expect the margin to be structurally lower here in, yes, back of the last, thanks.

Thank you, Daniel. I will answer the second question first and then maybe you Marie can think a little bit about the percentage not in detail, but around and of course, these extra cost is a little bit different. If you look to travels and meetings, we think that, that will continue in Q4 as well, but then it will be a lot less of those activities, conferences, et cetera, 2023. We also have to bear in mind that we faced post pandemic situation connected to needs for meetings. And we talked about that already in Q1 and Q2, that would come in Q3, Q4. So that's how it is and I think that's good because that's important to take care of our people. So that will continue in Q4, but and don't -- I think that what will happen is that we will have not that many of those activities at all 2023 and then it will go back to maybe normal 2024 probably. If you look at recruitment, well, I hope that, that will be a trend that we will have for the future in Q3 as well. We are heavily investing in growth that almost always if you are doing that well, costing some money in Q3, but you're able to get those highly skilled consultants out in assignments. So of course, in Q4 and Q1, that amount of people will be sustainably less, of course, that's how it is. And if you look at the margin for Solutions, mainly in connected to big frame agreements and subcontractors, well, that might continue. This is actually really positive because we have been able for a couple of years now. We are such a big player in Norway, so we've been able to take a lot of interesting big contracts connected to public sector. And we are not able to fill those projects ourselves with employees. So that will probably continuing in -- at least in next year and 2024 as well. That's really long-term assignments.

Fair enough. And yes, Marie, if you had any additional comments?

Yes, we didn't give any details about the conferences and travel, but I would say that might be a little more than 30% of the explanation. And then we have, see, as we mentioned, challenges in -- is the Insight business area in Finland and especially our new acquisition of Marketing Clinic, so we have around SEK 8 million for that involved. And then I would say...

I was thinking only -- sorry, so I was thinking only...

You must always -- reductions -- okay, yes, okay. So, yes, I guess the main explanation there is conferences and travels. But around -- I can't really give you any details on...

But let's say, the vast majority of it is conferences and travels and then we have some additional costs connected to recruitment as well.

Yes and may I ask you on the recruitment side. Have you seen any decrease in churn that makes it perhaps less costly going forward to for replacement recruiting the needs that might come down little bit given the uncertainty in the market or how to think?

Yes, the turnover is slightly lower. It was quite high in the whole business after the pandemic, so it's slightly lower and I expect that to continue to be lower the quarters to come. So that will ease the cost a little bit, yes.

That's good. And if I may also ask on Insight and obviously, the weakness was mainly in Marketing Clinic. And my question is, if you have been able to address this throughout the quarter and replace the lost contracts or weaker utilization somehow going ahead. And also that I know that you have this program that you educate IT consultants to become experts in IT security. How has this program hampered the margin, because I guess they can't quote yet the learning either security while invoicing clients or yes, if it had any impact?

Yes, of course, as you see, we net recruit quite a lot of people into the Insight area in the quarter as well, it's around 50 people. So it's a lot and that's mainly due to the need in cybersecurity area. So of course, that will affect -- is effect in the margin in the quarter. But I think that will be good for us within a couple of months, that's really important work to do. They have a really important work to do for the future. So with that said, it's another story connected to Marketing Clinic and Finland because what we saw there, they work with top line growth strategies around how to work with different market channels, strategies in how to work with getting things out on the market. And many of those strategical projects that they were conducting in Q2 were actually stopped in Q3 in Finland. But you have to be reminded that this is a very small part of Insight, but that actually did happen. And I think that we will suffer from that in Q4 as well. And then hopefully, in the beginning of next year, we will get back on track.

Yes, if you look at Q4 as a whole for Insight, I guess though that it's a better quarter than Q3 you only have like August, half of August and September to work. Should we expect at least that it's the last quarter with loss winning site are you -- the outlook is, turning back to...

I wouldn't like to give any prognosis connected to that, but we will have less people recruited in Q4 with lower cost. We will have the situation with some of the people that we recruited in Q3 out in assignments already in Q4, which is positive. And then, of course, as you understand, we will work thoroughly with the situation in Finland as well.

And on that note, you're getting Ascend coming in from the 1st of October. Is it possible for you to give us any clues on how they have developed so far in 9 months '22, so we get any cost we need to do our estimate for Q4?

Yes, they are performing really well -- estimate for -- sorry, no estimates for Q4 at all. But they are performing really well the first 9 months and they don't have the same situation in Q3 as Marketing Clinic has because it's different assignments, completely different assignments.

Yes. And can you give us ballpark the margin they've had in the first 9 months?

We do show that for 6 months, isn't that right, Marie?

Yes, we have a rolling 12 months of sales of SEK 122 million and 23.5 million in EBITA.

Then the margin.

Yes, up until June.

Up until June and the margin was around, look...

The margin was -- it was high, it was coming up -- sorry?

Yes, I just lost...

The margin was 23.

The margin was a little less than 20, it was 19, rolling 12 end of June. So that is what we disclosed, but we don't see any signs of them having challenges so far.

So a nice contribution into Insight from 1st of October then. I leave the floor for others and go back to the queue.

We have any more questions coming up?

[Operator Instructions] And we now have the next question on the line from Daniel Thorsson with ABG.

I have a question on the margin target, regarding the 12% margin target you initiated a year ago when you delivered many projects from remote, you had very low external costs related to execution and also keeping employees. Is there a risk that, that was a little bit too optimistic target given a more normal functioning market as we see today and the rolling 12-month margin is more like 9.5% today. So is there a risk that a 12% mid to longer term is a bit too optimistic in a more normal market?

I don't think that's a risk in a normal market. Of course, in a downturn and recession that affects the IT industry or the digitalization industry, it might be too optimistic. But overall, in a cycle, I think that is a good goal for us. We don't see any signs because you have to bear in mind that that effect on the margin in Q3 here, for example, is quite a lot connected to one-offs and investments. So the underlying possibilities to create the margin of 12% within a couple of years is still there, I don't see any changes in that at all actually.