Lasernet Group AB (FPIP) Earnings Call Transcript & Summary

Welcome to this live queue with Formpipe following its Q2 report. And I want to highlight the possibility to ask questions to Christian on our web page. And now I leave over to the CEO of Formpipe. Christian Sundin, you are welcome.

I'm Christian Sundin, the CEO of Formpipe. And this short session will be about the quarterly report for Q2 that we published this morning. So let's jump right into the numbers. Starting with the elephant. And for you who had the chance to review the report that came out a little bit more than an hour ago, you realize that something is odd with this report. And it is one large deal on SEK 41 million. It is our long-term customer, Landbrugsstyrelsen the Danish Agriculture Authority that has acquired the IP rights for our Grants Management system tab. I will come back to more details about this deal on the next slide. At the same time, with the big revenue of SEK 41 million up in license, we also take the opportunity to write down the entire asset from the balance sheet of the TAP product, and that's taking SEK 15 million out of the SEK 41 million. And we're doing this because the TAP platform is very much a customer unique platform has become that over the years and we will have more focus on our more scalable platform task going forward. I will elaborate a little bit more on that and what that means for us going forward. But for better safety story, we're writing down the asset of TAP anyway, then the future will tell if there's value coming back in that. That means that we have a positive EBIT effect on approximately SEK 26 million from this deal. Landbrugsstyrelsen, yes. It's the Danish agriculture authority. It's a long-term customer, actually for more than a decade. They are and thereby Denmark, a front runner within EU to automize the payout of EU grants to farmers. And they do that with the support of our platform, TAP and has been doing that for many years. And they're by far the most automated country in EU to do this with a very high percentage of the cases that goes all the way from application to payment without any case handler involved in it. However, due to that, the platform and the solution has become more and more complete. We also see less billable work compared to history from Landbrugsstyrelsen. It's also the case that frame agreements and tender laws in Denmark has made Landbrugsstyrelsen to go out in tender on specific task that is not core on the system. And thereby, they've been able to buy or tender or they needed to tender other tasks connected to this outside of our platform to other vendors. And that has been all in line with our strategy, not being part of those tenders or not bidding as competitive or aggressive as our competitors, thereby leading to a declining revenue that you can see to the right here, where we're coming from yearly levels of above DKK 60 million a year in revenue coming from Landbrugsstyrelsen, down to the last rolling 12 months of DKK 17 million. This new deal that provides Landbrugsstyrelsen the possibility to tender also core development of our IP from another part than Formpipe. So what we're doing is that we're packaging a branch of our product and delivering that to Landbrugsstyrelsen. They're actually not acquiring the IP rights. We still own the IP rights of this platform product, but they can freely now tender from third-party on to continue to develop this platform for their unique needs solely. That means that we have 2 opportunities. We could continue to develop our platform, the IP rights we still have for a broader, scalable customer base. But as I said on the last slide, we've decided to write-down the asset because we see that we can take parts from the TAP platform and bring into our more scalable platform that already fits a larger, broader customer base, the test product. So that's how we will play it. So this is really good for us, and this also secures our good relationship with Landbrugsstyrelsen for multiple years ahead. We have secured volumes of work all the way up to mid-2023 and probably longer, which is approximately around DKK 20 million a year in continuous development of the platform for their purposes. Some of those things, we might have benefit for our other platform as well. So that could be a double whammy for us over these coming years. So we are still very well positioned to continue to win deals and be the market leader within the area of Grants Management. And in line with our strategy, as I said, we will focus on selling products that we can scale and the beauty of recurring revenue and growing recurring revenue. So all-in-all, it's a real win-win situation. We're very happy with it, Landbrugsstyrelsen is very happy with it, probably the public sector in puts possibilities for us to be more focused on driving the Grants Management area even better and more focused on a scalable product rather than doing specific things for Landbrugsstyrelsen and they're free to buy specifically for them going forward. So a really, really good deal for us. I guess during the Q&A later, we'll cover questions on this. So continue to go back to the numbers from the report. We show up really -- the other really positive thing with this report is the continued strong growth of SaaS. And if we play with the numbers and we actually deduct the SEK 41 million of the deal with Landbrugsstyrelsen, we see similar level as last quarter on license, it's SEK 7 million. However, it's significantly lower than last year's Q2, it is SEK 3 million lower, and that's all in line with our strategy of transitioning towards more and more SaaS deals rather than traditional license. So that's all good. And there's a very -- especially last year's Q2, we had not yet acquired our partner, EFS in the UK. EFS, formally, when they were a partner, they only sold Lasernet as a traditional license. While we now -- when we own that part and that's a part of Formpipe, we have transferred the entire pipeline to only be [indiscernible], meaning that we have taken out a lot of what otherwise would have been a traditional license deal here, bringing up the turnover, of course, but since we are so focused on growing the recurring revenue in the SaaS, we have decided to move this way to drive the SaaS deal and we're doing that very efficiently at the moment. So the recurring revenues continues to grow. They're up SEK 6 million compared to last year. That's very much -- it's a 10% growth. It's very much in line with historical a few years back. However, the SaaS growth is stronger than the recurring revenue growth in -- altogether is a growth with 16% year-on-year. Delivery is still low on a low level but will slightly pick up now with the help from the Landbrugsstyrelsen deal, where we now have established the route forward with that customer. And also, we have more new resources onboard. It's been sort of a struggle to onboard people very swiftly during the pandemic with digital onboarding on new people, aboard. But we're now picking up speed and I will consider this level of deliveries being a floor level and will pick-up slightly over the coming quarters. Summing it all up. Total revenues are up by 43%. However, yet again, if we should exclude the Landbrugsstyrelsen deal, it's only a slight growth of approximately 2% year-on-year on the top line. However, bear in mind, look in the report, you can also see that we're hurt by FX revaluation of approximately SEK 6 million. So if we should take away the Landbrugsstyrelsen deal, let's also take away the currency effect and then we have a growth of 7%, 8% instead on year-on-year on Q2. Ramping up, as I mentioned, we're wrapping up the delivery capacity and capacity to support our partner network and drive more sales and ramping up cost money. And the cost comes immediately, the revenue comes later. So the cost line continues to expand in line with our growth strategy, and it is due to us ramping up in capacity and in new talent and onboarding those. We were 245 employees at the end of 2020. We increased to 262 in Q1, and now we're up to 271. We also increased the product development, where we have a lot of our product development offshore in Ukraine. We have beefed up that product development capacity in order to have a better, stronger product offering to our customer base. So profit is up for the quarter. yet again, if we exclude Landbrugsstyrelsen, if we want to play without that, the EBIT is down to SEK 4 million, and that is all in line and all in the line with the communication we made with the Q4 report that we're going in for a year of investment in future growth that 2021 will be hurting on the EBIT level. So on the capacity, I've already covered most of this. But as you can see, we're growing in capacity to support our partners, and we have added 26 employees since year-end and we will continue to add more people during the rest of the year. Growth in recurring revenue, yes, that is the essence of what we're doing. That is the reason we're around. And I would not be me unless I had a slide on covering what's going on with the recurring revenue. Normally, our recurring revenue is more than 60% of our total revenue. In Q2, due to the Landbrugsstyrelsen deal, that drops to 48%. Of course, this will come back rapidly already in Q3 to our normal levels, about 60%. You can see on the graph on the right that the stable growth in recurring revenue and has been doing that for many years with approximately 10% per year in growth in recurring revenue, and we're accelerating this with our growth initiatives. Our recurring revenue covers approximately 80% or more than 80% of fixed operating costs. And that of course, gives us the stability and lowest risk. And the reason we in the midst of a pandemic decides to go for a growth journey and invest in growth because we are resilient to external shocks like COVID. However, the investments we're taking right now, if you're looking on the graph below here, you can see that the trend line is going downwards. And that's, of course, because the costs were taken on board lowers the percentage and -- or actually increases the cost base and thereby low is the percentage how much cost is covered by the recurring revenue. But yet again, it will come back with the growth of recurring revenue. And the recurring revenue, yes, the best measure on seeing where the recurring revenue will go in the future is the ACV, the annual contract value. And the annual contract value won in this quarter is really strong. It's a SEK 9 million ASV quarter where SaaS growth is actually standing for SEK 9.2 million of that. And especially the product Lasernet as SaaS offering stands for SEK 7.5 million out of this SEK 9.2 million. It's also this actual Lasernet combined with the product Autoform DM that we acquired from EFS last year that stands for this. But that bundle of those 2 products is really, really strong in the market, and we see great traction in market for that. And we've seen really increased demand in the Temenos channel, which will also improve with the acquisition of EFS last year. And one example of that, in this quarter, we won an American Bank with an ACV of SEK 1.3 million on that bank alone for the bundle of Lasernet and Autoform DM. Last year, Q2 was also quite strong actually. That was to not driven by last back then. It was driven by frame agreement renegotiation and support and maintenance in public Denmark. So a little bit apples and pears, but we're comparing to a really strong quarter and still we're beating it quite significantly. So a really strong ACV quarter, and we now have an outgoing ARR on SEK 280 million, which is up 18% compared to last year. And summing this up, you can see far to the right here, the last quarters of SaaS buildup. In 2017, we come from levels of SaaS and approximately SEK 10 million here. And now we see how this growth on ARR is becoming even stronger. With a strong Q1 of SEK 5.1 million of SaaS ARR, now adding SEK 9 million on SaaS ARR coming out to almost SEK 70 million, as alone. This is really the evidence that our efforts and investment in growth, especially in the Lasernet and the partner channel for Lasernet is paying off. So I think all-in-all, I'm very happy with this report. There's a lot of good things to see in it. And yes, we're following the plan and we're executing on it according to plan. Thank you. I kept this as short I could since I believe there will be some questions on the Landbrugsstyrelsen deal, at least.

Thank you, Christian. And I would actually like to start with very strong ACV, as you just mentioned, I think that's the most important thing in the report, actually. And as we saw on your figure, it was the strongest number so far. And considering the acquisition of EFS and your focus on growing Lasernet, I mean is this a reasonable level going forward as well or what should we expect considering the very rapid growth in the ACV in the recent quarter?

Well, as you know, I'm reluctant to give a very crisp forward-looking numbers. However, we can go back to what we've said about growth in the financial targets we published in the Q4 report. And we believe that this is spot-on to what we believe on our plans of growth. So we see this as in line with our expectations and plans and according to our strategy. What we can say is that we probably have more to do more traction and better growth possibilities. If you talk about the flavor of the month right now or the quarter on the terminal channel earlier than we predicted and we really have a lot of use of the partner channel within Temenos, and we've come far in that relation, and we have progressed well with the Temenos partnership. But the Dynamics world is also really, really good for us. So those 2 are driving a lot of our growth initiatives. In the public sector, it's more stable. The pandemic still puts a damp a little bit on the delivery revenue to get those up on the levels we want. And it's not that we really want to deliver revenues, but we are convinced that more and closer relationship at side with our customers will generate co-creation and more recurring revenue on add-on modules to the entire public sector, and that is what we want to do there. So you could argue that we might be seeing better growth half year ago in the Temenos channel, but we're slightly, slightly behind perhaps on the delivery revenues that in itself will then in the next phase, lead to increased recurring revenue in the public sector space. But this is very much in line with our expectation, but I will not give you numbers on ACV quarter-by-quarter going forward. We're following our plan and we will meet our financial targets.

Okay. So what about the partnership with Temenos, you've been partners for quite a long time. However, it seems to taking off quite well at this point in time. Is that due to the acquisition of EFS or could you tell us a bit why it's taking off now?

The acquisition of EFS was a very important step in getting that closer in that relation and being able to invest in that relationship. EFS was a very successful partner for us for many, many years. However, driven by 2 entrepreneurs, cautious about taking on 2 big investments that is not immediately cash flow generating or hurting the short-term margins and so forth, meaning sticking to a traditional license sales model and not really investing heavily in marketing going for resources in the U.S. and so forth. We have invested in people in US. We have invested in capacity support partners and Temenos partners as well in that channel. And the human capital, the talent and the capacity we got with the people we acquired with EFS and having more investment into those people in that channel. So it's a more risky game, investing more, but we clearly see it paying off here. So it's the combination of the EFS acquisition and us investing more in that channel, I would say.

Okay. We've got a question from the web. Can you please give more color on the FX effect year-over-year?

Yes. It is mainly due to the Swedish krona strengthening towards the Danish krona since we have a lot of our turnover in Danish krona. We have a natural hedge. When it comes to the earnings, the EBIT, it's not big FX effects at all. It's the top line that is hurting from it and will be volatile. When the Swedish krona is strengthening, we will see a damp on turnover when the Swedish krona is weakening, we will see boosted turnover from FX effects, but there's really not much we can do about this since we have a natural hedge in the cost line on that, meaning that if we try to hedge our way after this, we will actually expose ourselves more to it. So it is just the thing to -- explanation item in it, but it has to do with that we are reporting currencies in Swedish krona. And depending on -- and of course, euro and U.S. dollar also becomes more and more valid for us. But yes, actually, the GBP as well since we -- the sterling since we have quite sufficient amount of people in the UK nowadays as well. But yes, I don't know if that answers the question, if I can get a more detailed question on the FX effect.

We will see if there's coming any further questions on the FX effect. I will take one of my questions in the meantime. I know that during the pandemic, you mentioned that some manufacturers, they switched their ERP system driving some Lasernet demand. And now it seems like pandemic is fading out, hopefully. What's your impression about the demand from those customers?

Yes. I mean, as you know, if we're going back a little bit more than a year, we had a scare about, especially private sector market demand would go down due to the pandemic. We didn't really see that a lot. We of course saw some customers with challenges, but we believe that the market demand has been quite stable throughout the pandemic. And yes, hopefully, it will be even stronger after pandemic, but we don't see clear signs of that just yet. But there is a strong market demand. And I think I've been elaborating on that before that. It's not the market that is lacking. It's our capacity to execute on the market demand. We're still a very small player, but we have an excellent product, both for Dynamics and for Temenos and for other ERP systems as well, actually. But it is to onboard more partners, to attract more partners and so forth. I don't think the end customer base market demand is the most important thing for us, it's us executing on our strategy that will drive good growth.

Okay. And so what about new partnership, I suppose the lead times are slightly longer compared to the orders you get from EFS, the acquisition, for example. What is it like? Have you added any new partnerships or...

Yes. We've added a few partnerships, especially in the US last year and also invested quite a lot in moving the current partners up sort of in knowing more about our product offering and getting them to take Lasernet with them in every deal, not every 50 or every 10th deal. It's a matter of really making all people at a partner knowing about Lasernet. I mean it is to have getting more people involved at the partner side and knowing the beauty of Lasernet. That is the work we're doing to make sure that everyone within a partner company knows about Lasernet and knows what value it provides to the end customer and especially how it makes their offer, their tender, their bid more attractive to the end customer because they can be more price competitive, that sort of thing. So we're moving our partner network up in knowledge about Lasernet and we have a 5-tier scale that we're working with to -- when there are an introduction phase to that they should at least make 1 dealer here to that we should vendor up on the scale on 5. Yes, they're just doing everything by themselves and they include Lasernet in every deal and they do the delivery of it. But there is a scale of our partners. There's 2 referral partners that don't deliver. They're only saying, hey, guys, we have a lead here. Do you want to be in on this. And there is the other guys that take complete ownership of the entire sales process and all the way to delivery to the end customer. And what we're doing, we're investing in moving more and more partner up the scale of that. And it takes time. But as you can see, it pays off to do that investment.

Okay. I want to remind everyone of the possibility of asking questions on our website. And then I will ask a question about Landbrugsstyrelsen. Considering regulations on public sector deals and the needs of the Landbrugsstyrelsen, what was the other possible outcomes of this situation if you wouldn't have sold the software, so to say.

Yes. We could have continued as is, but there was also strong with from us to not have 1 customer product making maintenance on and also strong wish from the customer to more freely tender this. And yes, it has been due to -- I mean, the ambition from more than a decade back when we won the deal, the tender with Landbrugsstyrelsen was, of course, that every EU country and also for other processes then granter farmers should be handled with this platform. So the ambition was this was way back before Formpipe acquired [ plan ], was that to address the biggest rental government customer in each country around massive product. As you can see on the numbers coming from SEK 60 million in development cost for the customer, it's not really scalable, it's not really addressable to a small municipality. It is for the really, really big elephants like the tax authority, the defense, the police. And yes, in this case, the Landbrugsstyrelsen pays out billions and billions of grants. So it needs to be enormous volume of cases in order to have an ROI on it. But that was the intention back in the days. We have made during the years a lot of efforts to -- with the agriculture authority of France of Estonia, Scotland and so forth. But politics has always sort of stumbled in the way of that and we have wanted to seek for partners doing this in other countries. And yet again, politics and tender laws in the different -- even though it's EU law and EU tender law, we have not been able to succeed in selling to customer 2, 3, 5, 10, which would have been good for every EU citizen actually because this is way more cost efficient than what all other countries are doing, including Sweden. But as I said, we are very well positioned with grants anyway with our more scalable product, which is suitable for many customers and also smaller customer than only the elephants. So that's what we're focusing on going forward. And we still have a very good relationship with Landbrugsstyrelsen due to this because they really want to drive this themselves. They want to have complete visibility of the source code in order to plan their roadmap themselves instead of us being continuously wanting to safeguard the source code in order to be a platform that is not customer unique. So I think this is the -- I wouldn't call it divorce because we will still very much work together for many years and most likely for many years longer than the disagreement state, but divorced from the product from our sake. So there's actually no downsides in this setup, as I see it.

Okay. You mentioned before that you were not really happy with the outcome so far in the investments towards the public sector. What's missing? What do you need to have in place before we can see a positive effect also in the public sector?

Well, I'm not sure if I came across completely right there. I think we're making a lot of progress in the public sector. What we can see is that we recruit a lot of people to the public sector of Sweden, public sector Denmark is doing great. And public sector Sweden, we have recruited a lot of people and the onboarding has been more challenging due to working remotely and getting people up to speed and to billability and go out to customer, of course, still difficult to go out to customer, meet customers and thereby, availability has been heard, but not mainly through the fact that our new people has not come up to speed. It is that the people that has brought them up to speed has not been able to do customer work. And that has taken a longer time. So we're actually according to plan with our recruitment and so forth. It's just that it has costed more in terms of billable hours to customers in the short-term scenario. And we will come out with that, and then with this co-creation thing we want to really do, we want to come closer with our current customer base and work with them on the next add-on module that they need to get more digitalized and help the citizens of their municipality of Sweden or Denmark to be more digitalized. And those sort of initiatives are not running as quickly just yet as we wanted from when we set out the strategy. But yes, it's a matter of nuances. We are on the right path for sure here. And we have 2 examples of seeing 2 modules or add-on products, the Adoxa product for quality assurance and sort of the digital assistant for the case handler in municipalities and governments or in the public sector space is getting an increased interest from our entire customer base in public sector, both Denmark and Sweden. And we also have a signature product, digital signatures, where we see a growing interest where public sector actually have higher requirements on digital signatures than what other software providers of digital signal they can live up to. And we have built that and we now have that in the market where GDPR, where data spend the authorities in both Denmark and Sweden have higher security requirements than the private sector has, meaning that we have a very unique position where we integrate the Signature product to our case and document management platforms. So we see growing interest in that and we foresee good growth in recurring revenue from that product as well. So those are 2 examples of us working closely with customers, getting ideas, building products and offering them to a broader customer base. So we are on plan even though the delivery revenue is slightly below what we wanted.

Okay. So during last year, you mentioned that the pandemic had a slight negative effect on projects in the public sectors. Is that effect still there or what's the outlook like?

Yes, it's still there, or to the reason I just mentioned that we are not out at the customer site as much even though everyone works within teams and digital meetings and so forth, very much focused on continuing the business as is, but business development, taking the next step on the digitalization journey, those sort of initiatives are slightly put on hold until people can meet up in meeting rooms and have workshop in an efficient way and so forth. So I believe there is a buildup of need of that going forward, that will increase demand going forward. But we see there is a lot of tenders in the market. However, very price competitive tenders that we see where -- yes, we see that the market is not excellent in terms of return of investment on the tender side at the moment, but we see still good growth potential and scalability in the public sector space.

Okay. Another question from the web. When there is a Temenos deal and the people need the things that you provide with Lasernet, are there any alternatives, any competition?

On output or customer communication management, which is the area we're within here, it's an add-on product to ERP system or such as in Temenos case, the bank core system. It's document management and communication to customer from those core systems that we're doing. In that space, there's plenty of competition. There are multiple vendors around the world that do similar products that we do. And going to the Gartner Magic Quadrant, you can find, yes, bunches of them. However, on the Temenos platform, we're the best. And I think anyone can call up Temenos and they would confirm that we are the best for that platform. We are seamlessly integrating in a better way than competition on the Temenos platform. We also consider ourselves to have a competitive advantage to competitors on Dynamics, one part of the Dynamics and part of the Dynamics that is in the cloud, the SaaS offering of dynamics of Microsoft Dynamics F&O. That's the former years back in time named Dynamics AX, that ERP system from Microsoft that's where we have a cutting-edge product. And thereby, if we get the lead and we meet competition on that, what we can do, how easily you can both configure and maintain our software combined with the Dynamic suit. We are daring to say that we will win those deals. But in the general platform basically, SAPs or the info or the Oracles or so forth, there's plenty of competition that we are just head to head with, I would say.

Okay. Thank you very much, Christian. That's all for today. Thank you for watching.

Thank you, everyone. Thanks.