Lasernet Group AB (FPIP) Earnings Call Transcript & Summary

[Foreign Language]

Eric, thank you. And I will have this presentation in English. So welcome, everyone. I'm as Eric said, Christian Sundin, I'm the CEO of Formpipe, and in the webcast today, we will cover the Q4 report and also the full year results for 2020. But I'm even more excited for the next agenda item, which is presenting our strategy for growth and to give my flavor on the financial targets that we published with the report this morning. So 2 sections. And I will jump right into it. First of all, a few highlights from 2020, an odd year for many of us or all of us, I would say, and I'm proud of the adaptability we have proven during this challenging year. The team of Formpipe, everyone in the Formpipe team adapted really swiftly and made sure that our customers continue to have their support, even though we had to swiftly work from home instead from -- at our customers and so forth. We were prepared. We had the tools. We had the processes in place and could adopt but not only us, also our customers and partners have provided a lot of co-creation during this year. Our customers working remotely, many of them through Microsoft Teams. And a lot of the information created in Microsoft Teams and those communications need to be stored and managed in a professional way. So we, our partner Microsoft and a few customers, we actually started an R&D process of building an integration to our core systems of case and document management to integrate with Teams and found actually extra use and digitalization for our customers in -- with that initiative. So everyone has pitched in during this difficult year, and that also applies for our shareholders via the Board. It would be a natural thing to just hit the brakes when things happen as the pandemic situation and just stop all long-term initiatives and await the pandemic to end. Our Board and our shareholders have endorsed us to do the exact opposite to strengthen ourselves to invest in future growth and think long term. See if there is talent that we can find now that has tougher to -- that we have tougher to find in normal terms than during this period. So I'm very happy with that and how we have managed the pandemic so far. We also made an acquisition during 2020. We bought a company in U.K., a former partner, EFS Technology. We acquired it thereby a software for add-on sales to our customer base, mainly for the customer base closely related that. And we also, more importantly, we got about 30 very skilled employees aboard Formpipe and that we, on a distance has integrated to Formpipe and our culture very successfully. I'm really happy to have those guys aboard, and I hope and I believe they really think it's a good thing to join the Formpipe Club. And then I wouldn't be me, if I wouldn't highlight the fact that we have continued to grow the recurring revenue and thereby accomplish an even better revenue mix than a year ago. Recurring revenue, recurring revenue. I will repeat it many times during the coming 20 minutes, and this will not be an exception. So digging into the numbers. I will not go into all of the details here, but we can see that, as I already pointed out, recurring revenue is growing. And for the quarter, 65% of the total revenue, for the full year, 63% of the total revenue coming from 1 year ago and 58% of the total revenue. So a growth year-on-year on 10% of recurring revenue. I think that's a strong number. On top line, in line with our strategy, the growth should come from recurring revenue. So a modest top line growth, while the delivery revenue and the one-off traditional license revenue has continued to decline. In the light of the pandemic situation and that we actually are positioning us for growth and taking investment in that already in 2020 to then improve the EBIT margin and the EBIT to SEK 53 million is, I think, a fair result in the given circumstances, and we have an improved EPS for the year as well. In the light of that, we have strong cash flow, solid recurring revenue and a solid business model and solid finances, the Board proposes at the AGM to increase the dividend with 10%, summing up to SEK 0.66 per share. Going into some more details on Q4. I already mentioned the strength in revenue mix and the year-on-year growth quarter-by-quarter 14% made up by both growth in Software-as-a-Service and support and maintenance. The support and maintenance growth is helped by the acquired -- support and maintenance growth from the acquisition of EFS. The nonrecurring revenue, as pointed out, are continued to decrease, in line with our strategy and is down 18% from last year. All of those all summing up to that the total revenues are for the Q4 year-on-year are flat, however, with a much better revenue mix than a year ago. We are gearing up and gearing up costs money and drives cost. However, the acquisition of EFS, a former partner that had kicked back on our sales of Lasernet that actually provides a relief of cost where these sales expenses are going down because we're not giving ourselves kickbacks. It's still -- it's in the salary cost of our employees instead. We do increase speed and initiatives on product development. We are building new add-on modules for our products to sell to existing and new customers. And we have recruited people in the U.S. to meet up with the market demand there, and we have, of course, taken aboard all the people from the EFS acquisition in U.K., and that increases the staff cost line in our results. And it's all to boost and drive the future growth of mainly Lasernet that we are making these investments. So all in all, quarter by quarter, Q4 by Q4, we're down on EBIT slightly. We are continuing to see the rapid shift towards SaaS sales. I will come back to that many times and it's quite an impressive journey we're on. Coming from SEK 10 million to now having an ARR going out to 2020 of SEK 58.5 million, rapid shift towards SaaS revenue instead of traditional revenue. But actually, the ACV in Q4 is even stronger than what first meets the eye due to the currency fluctuation or actually the Swedish krona has been strengthened compared to almost every other currency in the world during Q4. In order to get the right ARR going into 2021, we felt that we needed to revalue the entire contract portfolio of all our contracts to the current exchange rates rather than to the exchange rate, those contracts were once in a while signed to. And since we have approximately 80% of our SaaS recurring revenue -- SaaS contracts in foreign currency, this will swing from quarter to quarter. And we will, from now on, disclose the currency effects on the ACV every quarter. So actually, the ACV was SEK 4.4 million in Q4, and that is a strong number also in historical terms. Summing this all up, I think I touch based on most of these things. However, looking on the top line here, net sales, it's quite a modest growth over quite a lot of years from SEK 307 million to SEK 403 million over -- from 2014. But I want you to really pay attention to the next line. Our strategy has been to do 2 things: grow recurring revenue, increase margins. That is what we -- our strategy has been about up to 2020. Looking on that coming from SEK 140 million to SEK 253 million in recurring revenue over this period, also in combination, but taking out top line growth and still improve margins from -- at the low end on 2015 at 6% coming to 13%. We've been able to combine these 2 parameters in a balanced way and drive this growth of recurring revenue. Leading into the next topic of for today, the strategy for growth. I would like to use the positive trend of Lasernet as a segue and deep down a little bit in under the radar, how Lasernet in the private sector has grown quite swiftly over the year and previous year. We have now seeing evidence that the ramping up with the acquisition of U.K. and the people in the U.S. that is paying off. And looking on Q4, you can see the SaaS ACV for Lasernet. That's 4.3 that is actually 4.3 out of the 4.4 for Formpipe, I just mentioned. So Lasernet is really the spear here bringing us to growth, and it's paying off. And looking on the lower graph here, we see the full year effect on recurring revenue for Lasernet. This graph -- then actually -- also then includes maintenance, not only SaaS. And then you see coming into the year with a little bit above SEK 56 million. Then a lot of the growth in maintenance, the first purple bar there, that is, to a large extent, acquired maintenance of Lasernet since EFS was selling Lasernet and they had Lasernet maintenance, of course, maintenance revenue. But we also add on the SaaS Lasernet recurring revenue here. And now we are on almost SEK 75 million in ARR on Lasernet alone. And then Autoform that we acquired is not in these numbers. And bundling Lasernet with Autoform going forward will be an even stronger offering. There is clearly evidence for the market possibilities for Lasernet and Autoform by our partner network here. And with that said, that leads me in to why we today have announced a strategy for growth and that we're entering a new era in Formpipe pipe. I will come back to the financial targets in the -- at the end of this, but we will focus on accelerating growth in U.S. and in Europe. We are investing heavily in sales and delivery capacity to support our partner network that will drive sales of Lasernet and Autoform. We have, as pointed out already, we have a high share of recurring revenue. We will continue to drive that. That's why we have focused our growth even going forward to drive SaaS sales, Software-as-a-Service. But we will -- and we will drive this growth journey with organic growth, but we will still continue to look for complementary strategic acquisition to drive this growth even better. One step back, is that just to say, yes, I just mentioned that we have a strong and stable base of recurring revenue, making us having faith in going for this investment journey and this growth journey. We have a loyal customer base, and we have been growing our recurring revenue in line with our strategy more than 10% per year over numerous years right now. So that sets the stable foundation for us to take this leap. The market -- the market is clearly there. It's USD 11 billion market according to Gartner and it's a growing market. It's -- the content services market is growing by 10% according Gartner as well, the coming year. And more importantly so -- importantly so, the transition that we see from traditional license to SaaS is very, very clear. Gartner predicts that in 2024, 60% of all software sales will be Software-as-a-Service that really suits us well and our growth -- the growth journey that we're on. We have grown our SaaS for Lasernet on 55% from 2017 per year to 2020. Formpipe is standing on 2 pillars. It's the public sector and is the private sector. The public sector, we've been a market leader for many years in Sweden and Denmark, and we will continue to drive digital of the society and help our customers on their digitalization journey. That will be a profitable growth journey in itself. However, the growth will be even more apparent in the private sector and with Lasernet as the front runner for that growth. We are selling Lasernet as an add-on to the ERP system, Microsoft Dynamics. Microsoft Dynamics is gaining market share and is growing rapidly. We will get on their journey. We will tag on to the successful journey of Microsoft Dynamics, especially in the cloud, Microsoft Dynamics 365. The same thing applies for Temenos. Temenos is an upcoming -- they're a global player for bank and finance systems. With the acquisition of EFS, we got a much closer relationship with Temenos. Temenos is gaining marketing share -- market share on the bank and finance systems sector over the world, and we will tag along with Temenos partner network and their success journey with Lasernet and Autoform as a complement to the Temenos business systems. Going back again on Lasernet, yes, and some historical number. We see that we have quite a strong growth of Lasernet altogether, not only in SaaS sales. We have grown with more than 12% in average annually since 2016 of Lasernet and we will continue to grow that. And as I said, we will focus our efforts on Microsoft Dynamics 365 and the Temenos Partner Network. And what we will make as an investment in 2021 is to add on more capacity to support the partner network around the globe even better, making sure that they put Lasernet and Autoform into every deal, not just every fifth or tenth deal that they said, we should be there and we should be part of every deal our partner is doing on the ERP space with Microsoft and Temenos. So what is Lasernet then. Yes. It's an add-on product. It really simplifies document management on our ERP system. Actually, any ERP system, SAP, Oracle, Baan, you name it. but we put our focus on Microsoft Dynamics and Temenos because we think and we truly believe that on those systems, we have a technology advantage compared to competition. We have already more than 2,000 customers worldwide on Lasernet. And together with Autoform that we got with the acquisition of EFS, we have been making this bundle even stronger as a product offering for our customer base and for our partners with that customer base. In the ERP market, I mentioned the growth of the content services market. The ERP market is growing in similar numbers, around 10% a year according to Gartner and it will reach about USD 50 billion in 2024. But more importantly, it's an ongoing soft transition here, and that suits us perfectly with our offering. So what will happen in 2021 yes? We will increase capacity. We will have better -- even better support for our partner, making sure that we really get in to all the deals that are out there. We will be focusing on winning on Microsoft and Temenos, as already said. And these investments in growth, they will have a negative impact on our EBIT margin in 2021. Of course, they will. We will in parallel to this, of course, continue with our excellent delivery and excellent customer engagement with both our customers in private and public sector. And we see growth potential in the digitalization journey of the public sector as well as the private sector. That leads me into the new financial targets that we published this morning. We will grow with an annual average growth rate of 10% from 2021 to 2025. We will, at 2025, have 70% of our total revenue as recurring revenue. Already pointed out, we will take a hit on the margin in 2021, but we will bring that margin back up again gradually over the years up to 2025 where we will exceed 20% EBIT margin. Remember that I told you before, we have done this before. We know the scalability of software and in recurring revenue. That is what we will do. So we will invest in capacity, we'll bring up the recurring revenue, and that will then take us gradually to better and better margins reaching to the about 20% in 2025. The Board wants to continue with paying dividend to our shareholders and has now agreed -- are now publishing that we are keeping the dividend policy or actually altering slightly to be above 50% of our net profit, should be paid out as dividend over time. That's, of course, a decision for the AGM and the shareholder at those times, but that is the policy that we want to stick to. So in summary, we have a strong track record of delivering and executing on the strategy. Now we're changing strategy slightly going for more growth, less focus on margin, we will deliver and execute on that strategy as well. We have a balanced customer base in public sector and private sector. We have a market-leading position in content services with good expected growth the coming years. We have the partnership with Microsoft, and we have the partnership with Temenos that will pave the way for us in this growth journey. There will be negative impact on the margins in 2021. But we see significant sales potential and market demand for Lasernet and Autoform in the market. And we will benefit from the transition from traditional license to SaaS in the market. That was it from me. I hope Fredrik has received a lot of good questions from the audience here. Thank you.

Thank you, Christian. I would like to start with the question regarding the fourth quarter. As you mentioned, the ACV was quite strong, excluding FX. Could you comment a bit about the sources of the strong number. Did EFS play a role? Or was it mainly because of a strong market?

EFS definitely played a role in that, the capacity we have got with -- and the competence we got in with the acquisition of EFS has definitely contributed to that. But also the market is not slowing in -- slowing down as you could have expected in the pandemic situation. And it's also us doing a good job, I believe. So I wouldn't point at one specific reason for having a strong Q4. Q4 should be a strong quarter as well. Normally, it is and this year it was. So a number of parameters, I would say, or recent -- better capacity, good market conditions and us being able to convert the deals.

Okay. Now it's time for a question from the web. And the question is, could we get some [ ball plant ] figures on how many employees you want to recruit?

Yes. Recruiting talent is never easy. We see that it might be more achievable in the pandemic situation. There were other companies might struggle and that might free up really good competence in the market. But we -- for a 12 to 18 months period, I would say that we want to increase capacity significantly. It could be 30, 40 people that we want to add to our team. Of course, gradually, of course, depending on how successful we are in recruiting and finding those people and onboarding those people. But it is a hefty investment we're seeing in increased capacity to drive this growth.

Okay. I suppose that the bulk of the recruitment will be connected to Lasernet. Could you give us some rounded number regarding how much your resources in Lasernet will increase due to your planned hiring?

Well, first of all, we increased the resource -- the capacity quite substantially with the acquisition of EFS and gained a lot of competence from that acquisition in capacity. But I would say that, yes, the majority of what we're focused on here in the recruitment, I'm mentioning over the coming year, 1.5 years yes, it is around Lasernet. But it is also in other areas to support the growth of public sector as well. So there are recruitments in all parts of our business and growth plans for all parts of our business. But the majority is definitely on Lasernet. And if you're referring to what we're coming from, yes, of course, significantly lower capacities, especially if you take away also the capacity we added with the EFS acquisition. So we're coming from, yes, it will be over a 2.5-year period perhaps triple of capacity to support the partner network.

Okay. We got another question from the web. Your financial targets also partly include M&A. What types of acquisitions would you like to do?

Yes, that would be bolt-on acquisition to support this growth journey, of course. That should be something that drives a real synergy for us. it should be, for example, a customer base that we can address or already current products, too, or vice versa, a product that fits perfectly into our offering on our existing customer base. To put it simply, those would be the main reason for an acquisition for us. You could also see an acquisition as a recruitment of capacity, of course, which the EFS acquisition had a -- partly was even though it was also a product. So those are the different sort of acquisition targets that we could go for. But I would like to point out that the financial targets are the long-term targets. They're mainly driven by organic growth. We will be driving organic growth to a large extent, even though we will always wanted to add on suitable acquisitions to this.

Okay. We got another web question. You mentioned that margins will be hurt in 2021 due to your initiatives? Could we see a negative EBITDA margin in private?

Private, that's dependent on -- I haven't actually made that calculation myself, if it's -- I would say that -- it will -- depending on how successful we are with recruiting and finding talent and onboarding that the more successful the bigger hurt in 2021, I would say and the swifter payback in terms of growth in the coming years. But yes, if we're really successful, I would say that at least Lasernet, which is not our most profitable product at the moment, will probably be on red numbers in 2021 if we're succeeding really well. But bear in mind that we still have SEK 75 million in recurring revenue already on Lasernet going into the year. So we are -- we have a buffer of revenue in that with that business model we're having. But the investments we're going for are -- will push the margins downwards significantly.

Yes. Okay. So if I kind of ask quite the same question, but regarding the group level, you expect a negative impact during this year. I mean, is that 3% or 6% or even more on the EBIT group margin level. I mean, could you give us some like approximation on how much decline, which you should expect?

Yes. Yes. I mean that -- we have a plan, of course, and I will not give you a forecast on 2021. And also, we're not doing this for one single year. We're looking on finding the right resources, the right competence, the scale this business in a controlled way and that's operations. But if we're very successful with that, yes, 3 to 5 percentage units from the current EBIT level that would be success. If it's -- but more than that, I would borderline say it's [indiscernible] that we will find that and be able to onboard that much cost in an efficient way. So somewhere along that line, I would assume, depending on all other parameters in our P&L, of course, as well.

Okay. Your new target is to grow 10% annually on average until 2025. Assuming a 5% growth rate in every product, except for Lasernet. You will need to grow by 30% approximately in Lasernet. Is that a reasonable breakdown of your target?

Well, I haven't done that exercise specifically either, but it seems like a reasonable breakdown. But I think we have better growth than 5% of some of the other products as well. And perhaps we actually have a churn on some legacy products. So it will be in the total product mix, but it's not unrealistic calculation on top of my head from what you're mentioning.