LeadDesk Oyj (LEADD) Earnings Call Transcript & Summary

Good morning Europe, and greetings from beautiful Helsinki. Welcome, everybody, on our earnings call for the first half of 2022. I'm pleased to be announcing our results for the first half and taking a short look at the future as well. So our agenda for this call is that we'll be first having a short introduction to LeadDesk the company and the product. After that, we're going to be looking at the highlights of the first half as well as then diving into the key figures with our CFO, Paul Stenback, and then looking into the future for the second half. After the call, we'll have a fireside chat hosted by Henri Palomäki and during that chat, you'll be also -- questions and answers will be done as part of that. But without further ado, let's call the call. As said, here on the call with me, I have our Interim CFO, Paul Stenback, who will be going through the deep dive into the figures and myself, I'm Olli Nokso-Koivisto, I'm the CEO of LeadDesk. So LeadDesk, the company and the product. LeadDesk is a super-efficient customer conversation platform where you can host your customer communication one-to-one in a very efficient manner with the top-notch tools. We are a European team and a European company with some 60% of our revenues coming from the international markets and with offices and subsidiaries across the Western Europe. We are truly an European company and an European team. While we focus on market efforts on the European market, we are a global platform, meaning that we can service the local customers across Europe as well as global customers and Fortune 400 across the globe. Currently, we have some 60 countries where LeadDesk is being used. So really a global platform. We focus our sales efforts into Western Europe, but at the same time, we can service the globe. Then, going deep into the product. As said, we are the center of customer communication and conversations. In practice, what that means is that as a consumer, I can have my conversations with the channel I choose, be it Facebook or other social media, SMS, call, any channel, and our platform takes care of all the communication and all the technical parts of the communication. So you can have a seamless experience, however you want to communicate. Then, for our customers and their employees, we provide a host of user interfaces, omni-customer service, outbound for sales, mobile for the field and talk for the integrations with your CRMs and ticketing systems. On top of this, we also provide Jenny, our conversational AI that can have these conversations automatically and efficiently. So conversations with the channel the customer chooses, create interfaces for the different use cases. And then, of course, we service the customers we need to have the integrations to the back-end systems. And with these integrations, the employees of our customers, the customer service agents, sales reps can then efficiently service their customers. As we know, the #1 problem at the moment and the #1 problem I hear from our customers is that they are not able to get good employees, and they are having trouble retaining. With that end, we provide workforce engagement solutions, meaning we provide solutions which can benefit the sales reps and the customer service agents in their work as well as then providing team leaders, managers and so on, great tools. And this is becoming more and more crucial as contact centers and customer conversations are becoming more complex and employees harder to hire and retain. That's LeadDesk and the product in brief. Now jumping into the first half results. We are making progress towards our target. So our target of EUR 100 million in revenues, we are making great progress there, and we set some goals for 2022. Firstly, organic growth is super important for us. With that end, while there was very much positive development, especially for example, in Spain, also in Finland and some other countries, at the same time, the energy segment in Europe has been powerful in the second quarter. Across the continent, we've seen the energy segment in a huge decline, which also then affected our results for the second quarter. Of course, now we know this, and we've been mitigating this and moving also then -- moving on that front and mitigating the problems, but this did have an effect on our first half's and especially the second quarter's results. The second thing that is maybe a small hiccup, but small hiccups still was the enterprise deliveries. We are there 1 or 2 months behind our own schedule. But on the positive side, we reaped for example, from July to August, we reaped from 40% to 47% of revenue already on those projects. So they are well on their way, and we are looking forward to closing them by the end of the year as well. So well on our way there. And the risks on the enterprise side, I would say, are now only normal operational project risks and largely already mitigated and are moving to target. We also said that we will be working on the product. We launched our new outbound UI. So this is for the sales side. And now already after a few months, it's being used by thousands of agents across Europe and a lot of good feedback on the modernized UI. We also now worked on the integrations and all the integrations, the company, meaning the M&A integrations have been finalized. And on the positive note, while the market is, of course, what it is but for M&A, the market now seems a lot warmer than it was in the beginning of Q2 and when we were talking about Q1 results. So the M&A pipelines look a lot better now. M&A is again happening on the market. Lastly, partnerships with Salesforce. So we've now signed a partnership with Salesforce, and we look forward to publishing our app in the AppExchange during the second half of the year. We've already published an app on Zendesk Marketplace for ticketing and now we are publishing it also at -- in AppExchange for Salesforce. So we are taking also the integrations to the next level in that end. Then, moving on to the figures, I'll give it off to Paul.

Thank you, Olli, and welcome also from me. As a growth company, revenue is our most important financial KPI, and we've seen significant growth over the years, both organically and through M&A. In the first half of the year, we grew with just below 15% to EUR 13.8 million in revenue. Roughly half of the growth going to be attributed to the GetJenny acquisition, which is made in the second half of last year and the second half from organic growth, which was particularly strong in Finland, Sweden and Spain. As Olli mentioned, organic growth was negatively impacted by particularly 2 things: the energy sector and the uncertainties there, particularly in Continental Europe, and a slightly slower-than-expected ramp-up in our enterprise deals. In addition to revenue, our 2 other key KPIs are annual recurring revenue and profitability, as measured by EBITDA. Annual recurring revenue grew with roughly 22%, slightly faster than revenue due to the fact that some of the large signed enterprise deals are already reflected in our ARR reporting as it reflects the signed contract base whereas the revenue ramp-up is still in process. Our EBITDA margin decreased from roughly 15% in the first half of '21 to 10% this year driven by our growth investments in the enterprise segment from the second half of '21 onwards. And compared to the second half of last year, profitability improved slightly. So 15% revenue, 22% ARR growth and a 10% EBITDA margin. Back to you, Olli.

Thank you, Paul. Then moving on to look at the rest of the year. So we're looking still at strong organic growth, and we want to focus on getting the energy segment problems behind us and moving on to strong organic growth track there. At the same time, we look forward to extending our offering. One of the key things here is to look forward to the launch of the LeadDesk Talk on AppExchange in Salesforce. And this also, of course, reflects our commitment to ecosystems and partners as wellbeing then available in 2 major ecosystems, the Salesforce ecosystem and Zendesk ecosystem, 1 for ticketing and 1 for CRM. As said, also the M&A pipeline looks a lot better now than it did at the start of the quarter. And this is something that we hope to also continue on working and getting results on this side as well. For our outlook, we keep the outlook as it is, but we do define also that we see that we will probably end up at the lower half of the forecast between 13% and 18%. And this is driven by the energy sector. In Continental Europe as well as, of course, in the Nordics, the energy segment is in a huge distress in the business side. And that, of course, then reflects service providers also. At the same time, we do look forward to closing those enterprise phases and finishing of the deliveries there. But that is also something that on the revenue side, then is postponed as our businesses so that we charge on a month-by-month basis. And of course, if 1 month is that of this year, then it's 1 month less revenue for this year. But the projects in themselves are solid. Looking at the investment story. We see that the investment story remains, we are strong growth company and especially on the international side. So international side, business is growing fast and, of course, the Finnish business as well. And decline in 1 sector doesn't take away from all the other segments. We have a huge number of segments we provide for. We are stable and profitable. We are efficient and we provide very effective tools for our customers. At the same time, we must remain innovative and pioneering and this is something that we're excelling, and our customers thank us for. I'd like to thank you for the participation on the official part of the earnings call. As said, we will continue with Henri and Paul as a fireside chat, and you will have chance to ask questions during that. Thanks, and see you in just a second.

So welcome to LeadDesk's earnings report and this fireside chat part. My name is Henri Palomäki, and I come from Sijoittaja.fi, which is an information service for investors. I'm here to ask some questions from Olli and Paul. [Operator Instructions] So thanks for the presentation Olli and Paul. But once again, in your own words, how did LeadDesk performed in the first half? And which were the key milestones that you achieved?

Thanks, Henri. So looking at our first half and especially the second quarter, we had, of course, some hiccups in the energy segment. But overall, I thought our team made a super performance with all these changes that we couldn't really affect with the energy prices -- well, going through the roof in Central Europe and the energy companies in distress. That's not something we could affect. But now we, of course, are working hard on mitigating that. Also, the other thing I really thankful for is our team for being able to hike the onboardings on the enterprise side and achieving 47% employment as measured by revenue coming from those customers than in August.

Yes. And let's talk a bit more about the energy sector and enterprise sector a bit later. But first, about the numbers. So in your strategy, you emphasized growth a lot. And now you gained 14.5% revenue growth. And with this pace growth level, it would take like 10 years to get into your targets in long-term targets, EUR 100 million. So are you satisfied? Or how satisfied are you with the growth rate at the moment?

Well, looking at the growth rate, and of course, like we have to look at, for example, that we -- we had the energy segment declining, and I see that as something that we -- well, for example, looking at Finland, just now we see energy companies going bankrupted. It's not something that we can affect. But then looking at all the other segments, which we have a high focus in and energy segment is just 1 small part of our business. Today is no -- like no large risks identified there, and we are keeping our growth base there. And then looking at our growth drivers, if we look at the countries driving our growth, as Paul mentioned, Spain as 1 huge market. We could see through that business, we actually see also traction in South Americas. Then Sweden, which is an old market for us. And we can see that there for example, the Loxysoft deal, I think, has helped us there gain market. And then Finland, also 1 of the growth drivers, Finland, 1 of our -- it's our oldest market. And still, we are able to grow here. So I think that really speaks a lot for our team.

So there's a question from the audience?

Perfect. I may start? Can you hear me well?

Yes.

So it's [indiscernible] from Danske Bank. I have a few questions. Let's start with the weakness in the energy sector and trying to understand what's happening there. So could you please remind us how your billing goes? Is it like per user per month? And what's this weakness you're seeing in the energy sector? So are you seeing a lower number of users? Or have you actually lost customers in this sector?

Yes. Thanks. Very good question. So our billing is based on [ put best seat ] meaning 1 concurrent user. And typically, there's a minimum level of users and then the customer has an option to have a flexibility on top of that. And what we're seeing in the energy segment is that basically, they are limiting all day costs, meaning that they are declining in the customer service operations as well as then they are basically stopping all sales. So with energy prices hiking in Central Europe, 20% in the beginning of this week, for example, they don't sell anything more. They won't even sell maybe to only their existing customer base. And then now moving -- for example, in Finland, just read the news that the energy companies are moving only to the spot rate deals, which, of course, then has a big impact there. Then on the losing customers, we haven't lost customers on that front, except for bankruptcies, which has happened across the continent and Nordics.

And typically, how that works is that it might not be the actual energy company that goes bankrupt, but it's also the outsourced call centers. So energy companies might have their own outbound sales workforce, and then they have also outsourced some of their business. And these are particularly at risk here.

Okay, clear. And then have you seen lower usage in other segments as well? Or is energy an outlier?

Here, energy is outlier. So the other segments, we haven't seen change.

Okay, clear. Do see a risk that there are multiple bankruptcies to come now that we're going into a worse economic situation? We probably have -- have had some opportunistic entrepreneurs, maybe starting up some call centers using your software. So do you see a risk of increased number of bankruptcies?

The only sector we've seen on this risk is the energy segment. And on the other segments, we haven't seen any difference. Then if we look at the recession scenario, previous recessions that we've seen, of course, there will be a bit different type of recessions. But based on them, as I mentioned on the call, the limiting factor for customers is typically the employment market. And if they are able to skill up more employees, they will typically do that and that then raises the amount of seat usage per customer on our end.

So really to -- maybe to elaborate slightly more on that point. So although the energy sector is an issue right now, for many customers, this is really a business-critical software that they simply can't operate without. So for example, taxes need -- taxes to be booked also during recessions. So that kind of mitigates slightly the risk if the economy would turn significantly worse than it is right now.

Okay. Could you remind us how large is the energy segment for you as a percentage of revenue or customers?

The energy segment in itself is not a major part of our revenues. It is one part in many, but we have telecoms. Telecoms for example, is larger for us than energy for certain. And we have the public sector nurses and other public sector organizations, home security, there's a lot of other segments. Energy is just one part. But clearly, we see that the energy segment has been in great and -- like it's just that the amount of like change in the energy segment has been large. But the other areas have been able to perform.

And how does -- sorry, how does the importance vary between different geographical markets?

So energy segment is -- has been like in -- if we look at the Netherlands, for example, and Germany and then mainly Finland, Sweden. Because, of course, we have a high penetration of market foothold in those countries.

Okay, clear. And then final question for me on the M&A landscape. So what's happening there? Are your competitors being active in acquiring good targets? And then regarding that, with your current balance sheet, what kind of firepower you have for additional M&A?

So on the market landscape, there have been no major actions on that end. This -- very quiet for quarter 2. But now we see that there's more activity on the sales side, and there's more opportunities now available. Of course, we have to be very diligent on the balance sheet and making efficient use of our equity and capital. But now the market is still -- it's clearly opened compared to the second quarter.

And maybe another point to emphasize here on the M&A market is that back a year ago, when the tech stock market started coming down, private valuations didn't come down as quickly as the public market, which is common. But what that created for us is a situation where the private targets still had really high valuation expectations and then the public market and thus using our equity as part of the purchase price was harder to do. And this, we especially saw in the last months of last year and first quarter of this year. But that type has been a shift in that landscape. So now also the private valuations have come from down and during the Q2, both -- we've heard it both from other investors and the discussions with target -- potential targets that these are now more in line, which makes it easier for a player like us to do M&A. And that is really kind of improved our M&A pipeline as well.

And then the next question comes from Jaakko.

It's Jaakko Tyrvainen from SEB. I would like to continue still a bit on the energy sector. In your own analysis, what would need to happen in the markets in order to get back to kind of the cost of revenue you are seeing now? You mentioned it's EUR 400,000 on an annual level. So what would need to happen in the markets? Should we see declining prices or stabilizing prices or what is your take?

Well, I think you will see, first, so I think if you have stable future's prices on energy on the secondary markets, to my understanding, future prices for energy not, very big market at the moment on NASDAQ simply, for example. When you see those markets stabilizing, meaning the energy companies being able to somehow mitigate their own risks, that will enable them to come back to the consumer market than in return. And then we don't see like there being a fundamental problem between us and the energy segment we see at Brooklyn in the energy segment not being able to deliver to their customers and there being too much risk and that is the fundamental problem.

Another thing to emphasize, it's exactly as Olli said, but -- so what I mentioned earlier about it often being about outsourced call centers. So these are typically pretty small and very entrepreneur-driven and flexible companies. So it might go down pretty rapidly as it partially has done now. But then if we were to enter a situation where the market stabilizes, energy companies are going to be -- want to sell again and that can pretty rapidly ramp up sales in these outsourced call centers leading to increased use of our software as well. So we're, of course, hoping that the market will recover, and that could also pretty rapidly improve our situation as well in that specific market.

Right. That's helpful. Then your growth and especially the organic growth, which was just 7% in the first half. What is your understanding how this compares to the SaaS operator or SaaS market growth in your own field? So how have you been in terms of the markets during the first half?

So our understanding is that looking -- there's 2 separate markets there. The Nordic market where the call penetration is -- if we look at first [indiscernible] report, for example, they see that their SaaS penetration is -- call penetration is really high in the Nordics already. And here, I see that we are also a market maker in the sense that we are growing with the market. And then looking at Central Europe, especially then Spain as a growth market where we also see percentage-wise, the way highest growth. I see that we are locally growing above the market but of course, it's only a part of our revenue as it is only a few years old for us.

Okay. Then perhaps looking at the -- towards the second half of the year and next year, how is your current sales pipeline looking? And meaning especially the enterprise segment clients where the deals are typically tilted towards the year-end, and then we saw quite a few deals in the end of last year. So will we hear some news during the second half of the year?

So our pipeline on that price side looks good. Of course, now we have to see how the market develops. We don't have experience from recession with the enterprise deal yet. That is a new segment for us, only a few years old. But on the general side, I see that our pipeline is good on the enterprise side, and we're progressing well. And especially the Salesforce partnership has really taken -- been taken very well on the enterprise side where the usage is much larger than on the SME where -- well, we don't see sales products at all on the SME market. So these factors, I think, are in play also in the second half of the year on the enterprise segment.