Lemonsoft Oyj (LEMON) Earnings Call Transcript & Summary

[Audio Gap] Now Alpo, please go ahead.

Thank you, and welcome from my part as well to Lemonsoft's '24 Results Presentation. My name is Alpo Luostarinen, and I'm the CEO of Lemonsoft. I jumped into the CEO position in September '24. And before that, I've spent a bit more than 3 years working on M&A and strategic development at Lemonsoft. We've had quite an eventful year in '24. Our revenue grew to EUR 28.9 million, and our net sales growth was 9.7%. Adjusted EBIT was 22.3%, reducing a bit from '23. Personnel grew to 228 employees from 208 the previous year, and most of that growth came from our 2 acquisitions, Spotilla and Applirent. We've had a lot of changes during the year. First of all, our biggest change is the migration of data centers on which Lemonsoft softwares is run all the way to Azure, which is very crucial for our future development and has been -- we've been working on the migration for 1.5 years now and expect the completion to finalize in first half of '25. We are quite far at the moment and looking to finalize everything soon. We also did a transition to a new e-invoicing operator, which was successfully completed quite early, at the later stage of '24. Both of these changes, we expect to have a positive effect on our profitability, our scalability, our service offering or how the service is run and how the customers are served. We also had a lot of changes in the management and organization. In addition to the CEO changes, which we actually had 2 during the year, we also had Tuomas Koivisto joining the management team as Chief Commercial Officer in June; and Janne Tammi as Chief Technology Officer in November. We also did other smaller structural changes and responsibility changes within the organization. The aim to make the organization more efficient and to provide more value to our customers. Especially with regards to Tuomas' position, he's working on getting the group sales function to function as one team and to provide one unified solution to our customers. The 2 acquisitions we did in '24 were a bit smaller than we've done before. Combined revenue was EUR 1.5 million and EBIT, EUR 300,000 roughly. Spotilla is well suited addition to our manufacturing offering, which is our main focus area going forward -- or one of the main focus areas. And Applirent expands our offering to rental management, which works quite well with our -- especially our transaction business. And Applirent has a wide ERP solution for that segment and has been working there for the past decade. Looking at Q4. Especially, our net sales growth was very limited compared to our previous years. And one of the main reasons is our consulting sales being significantly lower than earlier. One target we have is to increase the share of continuous income, recurring revenue, and that also has an effect in the consulting revenue in the future as well. Gross margin was a bit higher, 86%, than the previous year. We've reduced the use of external services, which has an effect on that figure. Adjusted EBIT was 19.6%, which is, of course, a lot lower than what we typically target. A few of the reasons -- or one of the major reasons is the Azure migration, which had a direct expense effect for the whole year and especially in the last quarter. And of course, also, we had parallel expenses coming from the previous platform as well as the new one. So that -- both of those changes will affect also in Q1, but in a smaller scale. Recurring revenue grew to 82%, and we expect that figure to grow going forward as well. Looking at the past 5 years. We've had a continuous growth in revenue, ending close to EUR 30 million the past year. Adjusted EBIT came down a bit from EUR 7.2 million in '23 to '24 figure, EUR 6.4 million, and that's, of course, not the direction we want to go. And we expect the changes we've done in the past 6 months and longer than that as well, with the Azure migration, we expect the effects to be positive, especially in the second half of '25. Looking at the quarterly development. In the last 3 years, one of the aspects you might consider is the higher revenue, especially in the last quarter of the year -- this year. In '24, the effect was more limited than in previous years. We've had -- especially in '23, we had a really good consulting sales quarter at the end of the year. And going forward, we expect that difference to be lesser. Looking at the market. We focus on manufacturing, wholesale and services market. And especially, the market manufacturing has had quite a difficult year. '22 was a really good year for many companies and especially '21, '22. And after that, we've had quite a ride in '23 and going into '24 as well. Especially, the beginning of '24 was difficult. Interest rates going higher. The market -- the labor market negotiations were tough in the beginning of '24, and that had an effect on the whole demand/supply situation. Going into the later part of '24, the situation got better. We are still in a situation where we have pretty low visibility on how the situation will develop. Of course, we expect the positive trend to continue, but we are sort of would say cautiously optimistic on how the market will develop going forward. What we've been focusing operationally, especially in the last quarter, is to develop our sales operations. As I mentioned, our new Chief Commercial Officer has been focusing on getting our -- all of our products to be sold as a unified proposition to especially manufacturing and wholesale customers and, on the other hand, as a horizontal offering with financial management solutions, HR solutions to a wide range of small- and medium-sized customers. We'll be talking in Q1 more about the commercial approach we've taken and how we expect us to win new customers. From the group point of view, we've focused a lot on integrating the acquired businesses, both the 2 ones acquired last year and the ones acquired -- the 10 companies acquired before that. We've nominated a person acting as Chief Operating Officer, focusing purely on integrating subsidiaries, making sure that the processes we have in place for all companies combined and aligned with the group's overall vision. Cross-selling initiatives have been increased. We are building -- or selling a broader solution, and we are actually focusing on individual metric that we follow is the number of companies using more than 2 different software solutions that we offer. Customer implementations, we had quite a difficult situation after the summer -- or actually during the whole year of '24. We made a lot of effort at the end of the year to improve the resource capacity in that specific function. We addressed the challenges that we've had before, and we made some individual changes in the responsibilities of the management of that function. And now we have a really much better situation. We've had the capacity restored a few more resources in the function, and we expect the customer satisfaction to improve going forward. Technology transitions, I've discussed a few times before. We expect the Azure migration to finalize at the latest Q2 '25 and in Azure operation to provide a better service quality for our customers in the future. As you probably know, we had a ransomware attack basically 2 years ago in '24 spring. After that, we've hired an information security manager. We've put a lot of effort into getting our information security level much better than it's been before. And we've also made a lot of effort in the management team and with the key individuals within the organization to regularly practice situations that might happen regarding information security risks. And we are very confident that the work we've done provides us a very good position to react in any case in the future. We've also initiated a capital efficiency program focusing on share buybacks. And the objective is to improve our capital efficiency and earnings per share. And that has been going on since November, and it's been developing well. Looking at the acquisitions we did in '24. Spotilla is one of the market-leading solutions for maintenance, field service, after-sales management. And it's a really easy solution to take in to use, easy, very intuitive solution to use. Around 200 small-and medium-sized customers, especially in industrial manufacturing use Spotilla's software and services, and that has a really good effect on our market position within that segment. The company is around EUR 1 million in revenue at the moment, is growing well and has a positive cash flow and EBIT position. Applirent is focusing on rental and fleet management and has a customer base in construction, manufacturing and wholesale segments. Around 100 customers, a bit more -- a bit bigger customers on average size than Spotilla. Company is quite the same size as Spotilla, grows a bit more sort of slower but steady. And EBIT profitability is very, very good for that size of business. And then let's move on to detailed financials. If we look at our revenue distribution in the past few years, we've had an increase in -- especially in transaction revenue, which is due to the acquisition of Finvoicer in the middle of '23, and that also brought some revenue increase in transaction fee in '24. Consulting revenue has grown also in '23, but due to the focus that we have right now, it's going a bit down, and we expect that trend to continue. Looking at the SaaS metrics. Churn has grown a bit before in '23, up to 5.4%, which is the highest we've had on an annual basis in the past years. And during '24, churn went down a bit to 4.4%, which is a good direction, and that hasn't been sort of alarmingly high at any time. Net revenue retention is, on the other hand, it's on a level that we are not at all satisfied with, especially upsells, downsells -- downsell within our current customer base that needs to improve. We are focusing on getting our current customer sales processes in place. And we've -- actually, at the end of the year, we moved the current customer care and sales function -- from customer care to under sales function, which we expect to have a positive effect on that. Good. And then let's look at the ARR development in more detail. We had annual recurring revenue in -- at the end of '23 at EUR 20.6 million. New sales was EUR 4.2 million -- 4.2%, which is, of course, a lot lower that -- than we expected to be going forward. Downsell and upsell, as you can see, it's on a positive side, but it's still very low, and downsell has been -- or let's say, our customers have been reducing the use of our software in the difficult times in the market, and upsell has been limited. And now we expect that to improve in -- on both sides. Churn, I've discussed quite a bit, and we expect that -- we expect the Q1, Q2 situation still be not that positive since we have a lot of changes going on, but that we expect the churn to remain fairly limited. We had 6.7% growth in -- from M&A, Spotilla and Applirent acquisitions, and that goes to -- from a revenue side, that brings us some revenue to '25 as well. And then on the expense side, no significant changes, but something that we could take a look at. The employee benefit expenses -- or personnel expenses has been going up, which is a direction that we want to change. And that figure is now close to 50%, and we expect that to go down at least at the end of '25. The other operating expenses has been higher than before at 13.4% in Q4, and that figure has a lot of expenses from the Azure migration and the parallel expenses with the previous and the new platform. From the personnel side, we've grown to 228 people. The organization is currently at -- the size of the organization is currently at the level that we are satisfied with, and we don't expect the need to significantly increase the number of employees. We'll invest in increasing the number of sales employees, especially, and make some other smaller changes, but nothing drastic. From a management point of view, I discussed the changes that we did at the end of last year. We also changed the roles in the product management organization. So Kari Joki-Hollanti, the founder of the company, moved from product development to manage the product management function. So basically driving the direction that we want to develop, the whole product suite that we have. And Janne Tammi joined the management team, and he leads the product development function. And his main objective is to increase the efficiency and quality of launching new products and further developing our product portfolio. We've had difficulties in the speed that we have to bring new products into the market and to develop existing products to lead in the market. And both of those problems, we expect Janne and Kari, to be well suited to fix, and they are in full speed at the moment. As I mentioned, we also strengthened resources and clarified responsibilities within customer implementation. And we also combined the 2 functions of implementations and customer care. And we want those 2 functions to act better in unison. Good. I think we are fine with the organization. And then going to the year '25, we have a fairly cautious outlook on growth, net sales growth from 0% to 10%, which is -- we expect the organic growth to improve, but we don't -- we are still looking at the growth outlook from a sort of current situation point of view. And as far as we don't see significant changes at the current state, which we, at the moment, have a lot of changes going on still, we don't expect to sort of guide a strong growth momentum yet. And also the market uncertainty is quite high at the moment. Still, we expect positive trends to continue. But as you all know, the market situation, especially from wide geopolitical point of view, is quite uncertain. As I mentioned a few times, the technological changes will affect profitability negatively during early '25. And after that, it should be -- should have a positive effect. Then looking at the IR point of view. We will publish our annual report during week 12. We'll have our Annual General Meeting on -- in April '25. And the interim reports will be published pretty much the same schedule as previous years in April, August and then in October. Good. And then I would like to give the mic to Jan.

[Operator Instructions] For the moment, we don't have any questions on the lines, but we do have a few questions in the chat from Atte Riikola at Inderes. First question, your organic growth in '23 and '24 has been slightly negative. How do you assess this development in relation to your overall market and competitors?

Yes. Thanks, Jan. Our overall market position is fairly good if you look at it from manufacturing wholesale point of view. We win the right kind of customers, and we lose a very limited amount of the same type of customers. In some aspects, if you look at our -- one of the -- some of the companies that we've acquired, we've had some changes in the management of those companies. And some of the companies have experienced higher churn that we'd like to see in this point in time. But we have invested in sales and customer care functions in all those subsidiaries, and we expect the trend to change going forward. We've also invested in customer care within Lemonsoft, and that should have a better effect on customer satisfaction. And when we get the product development after the Azure migration, product development up to speed and all the changes back, I expect the situation to improve.

Okay. Thank you. Next one, could you open up the profitability impact of Azure migration this year after the project is done and the old platform is shut down?

Yes. So this year, the costs -- direct costs have been around EUR 0.5 million. And then we've had an effect from the parallel use of both platforms, around EUR 100,000 to EUR 200,000. After the old platforms shut down, which should happen sort of -- it goes gradually down, that should happen in February, March, we expect the cost of the parallel use to go down close to 0 from current of EUR 50,000 to EUR 100,000 per month.

Okay. Thank you. Then next up, you are basically guiding flat or slightly decreasing profitability for this year with guidance midpoint. What is burdening profitability this year?

So if you look at our overall profitability, how our profitability develops, it depends pretty much on organic growth. So if our organic growth is 0 or negative, we will not have a positive profitability effect if we don't reduce the number of employees significantly. At the moment, we are putting a lot of resources into the technological transitions. And before we finalize that, then we get to focus on the development of the actual functionalities in our software. Improving our organic growth drastically is not easy. So we expect those changes to finalize. Then we expect to be able to focus on selling new software solutions and selling to our current customers. And then after that, we expect organic growth to improve and then have an effect on profitability. As I mentioned, we have quite a cautious guidance on both profitability and growth from this point of view.

Thank you. Then still, Atte Riikola of Inderes continues. Lemonsoft's profitability has decreased a lot after IPO and during that time announced over 40% EBIT margin. Target seems nowadays is really high. What is your current ambition with profitability in midterm?

Yes. When we announced those targets in -- back in '21, the geopolitical economy -- or whole economy was quite in a different situation at that time. During the past 3 years, we've had difficulties -- surprising difficulties, both in our own software development as well as information security, as I mentioned. So all of these changes and, of course, the acquisitions we've made, 10 plus acquisitions in 4 years, have been a bit more difficult to manage from a profitability point of view. So all of these changes have been -- have had a negative effect on our profitability, and we expect that to turn around, and we are working a lot on that. And it, of course, depends on when we are able to do that. But we'll provide an update on the long-term and midterm financial targets later on.

Thank you. Then there's been a lot of changes in Lemonsoft organization. How has employee satisfaction and attrition level developed during '23, '24?

Yes. Especially in '23 and a bit -- then going into '24, we had a lot of changes in our attrition level and then a lot of changes in the management team and in the higher and the upper management as well. And during the past 3 months and looking forward, my personal point of view is that the situation has stabilized. The employee satisfaction, we go through on a quarterly basis in detail, and we talk to all the teams that we have and what issues they have. And we've seen positive development from that point of view. But of course, that's a continuous issue, and we work on that heavily.

Okay. Then about M&A, are you mainly looking for smaller bolt-on acquisitions? Or are you still open for some bigger deals if the opportunity would be there?

Yes. We've been focusing on bolt-on acquisitions for the past 4 years. We always carefully analyze the market if there are bigger deals available. And we've been participating in discussions regarding bigger deals as well. And we'll definitely consider those going forward as well.

Okay. Then what is Lemonsoft's view on AI? And what kind of development projects do you have related to that?

Yes. Good question. We focus on using AI as a tool in our product development. And we've, actually, in the past 2 months focused on getting all of our product development people to use the right tools at the right sort of -- from the right perspective to use the right tools. And there are a lot of tools available at the moment, and the number of tools improves and increases all the time. And we have already seen a lot of good development in our own product development side. From a proposition point of view, we are piloting a few efforts that we want to bring into the market. We'll discuss those more in detail. I'd like not to sort of promise anything, but we are working with a few partners to develop AI solutions for our own internal use, especially for our customers.

Okay. Then about cross-selling, is there some specific product combo that has been working well on that side?

Yes. We actually follow, on a monthly basis, the number of customer companies using specific combos of our products. And one combo that has been working well for the past 4 years is Lemonsoft and Kellokortti combination. So there's Lemonsoft's ERP solution, could be manufacturing company, wholesale company that uses Lemonsoft's product management function or production function or warehouse management function, then combine that with financial management, HR and then time management solutions of Kellokortti, which is quite a good combo. Then we have Finazilla, which is a reporting budgeting solution, and that works quite well with all of our products, especially Lemonsoft Finvoicer and so on. Finvoicer provides a few different alternative propositions. They work on invoice life cycle management and invoice financing and so on. And we built Finvoicer's proposition basically and are building the financing option as well into Lemonsoft. And that combination has been quite heavily taken into use by customers.

Okay. That was the last question in the chat. So back to you, Alpo, for closing comments.

Thanks, Jan. And we look forward to finalize all the development that we have ongoing in '25. And at the end of the year, we expect us to have a good market position, good product position and a lot more efficient processes within the organization. So looking forward to developing to the right direction. And thanks a lot for joining. We'll come back in the next Q1 report in April. Thanks a lot.