Lemonsoft Oyj (LEMON) Earnings Call Transcript & Summary

Welcome to Lemonsoft Q1 2025 results. We will start with presentation of the results followed by a Q&A. Please use the chat function in the player for questions to the speaker. Lemonsoft CEO, Alpo Luostarinen. The floor is yours.

Thank you, and welcome from my part as well to Lemonsoft's Q1 interim report presentation. My name is Alpo Luostarinen, and I act as the CEO of Lemonsoft and will be presenting today. We've had, again, quite an eventful Q1. We've been progressing the changes that we've been working on for the past year or so, and everything has gone quite according to plan, although with some bumps in the road. But as for the financials, we were able to grow 10% in Q1 compared to last year's first quarter, mainly due to the acquisitions of Spotilla and Applirent in July '24. And then also, we were able to get our organic growth back to a positive track. And organic growth was 3.1%, basically driven by a few factors. First of all, our sales have been -- there's been a cautious uptick after Q4 last year and Q1 this year. Our Lemonsoft ERP and Kellokortti price increases have also contributed to the organic growth that we implemented in the beginning of the year. We are now beginning to report, on a continuous basis also, our organic growth figure for recurring revenue, which was 4.6% in Q1. We also implemented -- after we implemented the price increases, we will do some price increases to other products also later in the year. So we will see some positive benefits from that part later on. Our gross margin increased a few, let's say, 1.4% in Q1, mainly due to reduced external services as well as the price increases, and that's been a positive direction lately. Our profitability increased quite significantly from 16.2% last year to this year's 23.1% of sales. The profitability was benefited also from the delayed salary increases. So due to the local collective bargaining negotiations, the increases in salaries have been delayed until May '25. Our recurring revenue share increased. That's due to basically Spotilla's higher recurring revenue share as well as our reducing consultancy revenue lately. And also transaction revenue has been growing less than previously. Our number of employees has risen from 220 to 230 since last year's same period. And basically, Applirent and Spotilla acquisitions have increased the figure a bit. And otherwise, we've been actually reducing a bit of personnel. Other main events that have happened in Q1, we have nearly finalized our Azure migration, which is one of the biggest projects in the company's history. And we started the actual transfers in December '24, and have now in January, February, March and April, implemented the remaining parts. And after April '25, we should be quite finalized with the project and everything should be transferred to Azure from our own data centers. Of course, there's been some effects on our customers' use of software, which we have been working on very thoroughly, and we hope to be able to finalize all the corrections and changes in the system in the next weeks and months going forward. We've also initiated change negotiations in April after Q1. And the objective is mainly to ensure our efficiency and profitable growth in the coming years. So we are not looking for short-term cost reductions, but longer-term profitability enhancements. We estimate that we need to reduce personnel at most 35 employees. About 192 employees are included in the change negotiations, and we'll report in more detail at the end of May, when the negotiations are finalized. On April 23, so last Wednesday, our CCO, Tuomas Koivisto, left his position as member of the management team as well as his roles in Lemonsoft's CCO position as well as CEO of Finvoicer Group, and we'll continue recruiting another person for those roles. Basically, the invoice financing business that we have under Finvoicer hasn't been run as we'd like to, and then we've had to draw conclusions. Also with that regard, the provision of credit losses on trade receivables and financial receivables has been reassessed, and we have a significant increase in the provision from EUR 0.1 million, so EUR 100,000, to more than EUR 1 million, which is significant and the credit losses and the provisions related to those are related mainly to Finvoicer's invoice financing business and mainly to one significant customer. Moving forward to the monthly and quarterly development, Spotilla and Applirent acquisitions are driving the sales growth mainly in Q1 '25. In previous years, we've had a significant increase in sales in Q4. And as you can see, the effect of that single higher peak in the quarterly development has diminished, and we expect to see more stable growth going forward. And as for the revenue split, SaaS revenue has grown to almost 74% and transactions has gone down a bit and consulting revenue as well. So SaaS growth, as we've commented many times before, we will be emphasizing the effect of SaaS revenue to our business going forward. And a few comments on our operational focus during Q1. We had a good quarter in terms of manufacturing and wholesale ERP deals, and we've increased the share of those deals compared to our overall sales performance. We've piloted a few different pricing models. We are planning to make deployment easier for our customers, so that they can move from other company's software easier to our software. We are expanding or making it easier for customers to expand to more and more software solutions within our product portfolio and make it more attractive for also new and existing customers. And that we've had a positive feedback in the beginning of the piloting phase. The technology transition, I already commented briefly. We've moved several hundred customer environments and thousands of customers into cloud, and that's almost finalized, and we are expecting to see the cost and efficiency improvements later in the year, especially in the second half. We've been working on integration and group level sales. We've moved basically all our group companies into using Lemonsoft software in their own administrative work and to enhance visibility across the group, for example, in terms of sales and other performance. Then we've also increased the number of customers taking into use several solutions from our offering, and that is also related to the piloting of different pricing models. We've started the organizational restructuring, which affects the organization in a quite wide extent. The change negotiations are related only to Lemonsoft Oyj and Finvoicer Group, which are the 2 significantly largest entities in the group. So almost more than 190 people are anyhow affected. But we'll make the decisions and conclusions at the end of May, or that's the plan, and we'll see the effects after that. We think that approximately EUR 2 million, we would be able to save if we go with the initial estimates. Then the product development side. We've been reorganizing our product development teams in February and May, and we are continuing that work in the change negotiations. And after Azure migration is finalized, we should have more resources to focus on, achieving a significant improvement in the product development cycle time, which is one of our key strategic targets in '25. And lastly, capital efficiency. We've implemented or initiated last year the first share buyback program of Lemonsoft's history, and we've now finalized the first phase, which ended at AGM this year. We've acquired or bought 106,000 shares worth roughly EUR 1 million by the end of Q1. And the objective, of course, is to improve capital efficiency and EPS and make the earnings per share for our investors higher. And a brief overlook on our financials. Net sales, especially in Q1 '25, has grown in the SaaS revenue, especially. And as you can see, transactions have been stable and consulting and other revenue as well have been stable. So the share of SaaS increases. I briefly already commented on organic growth and the biggest effects have come from price increases as well as the slightly improved performance in our new sales and upsell/downsell figures. And looking at the ARR development in detail, we had EUR 21.9 million of ARR at the end of '24, and that figure is adjusted based on Finvoicer's recurring revenue reclassified partly into transaction revenue. So new sales, roughly 1%, which is significantly less than we want to have, but that figure we expect to increase and want to increase later in the year. Net downsell and upsell has been positive. Part of that effect is price increases and part of that effect is current customers increasing their use of our software. Churn was slightly elevated in Q1. Especially in January, we saw some customers that actually informed us already in the beginning -- or in the middle and end of last year about reducing use of the software. And that figure is -- and we expect it to be a bit elevated in the first half of '25. And after that, by the end of the year, we expect that to go down, and that's our target. Now we've ended up at EUR 22.4 million of ARR at the end of Q1. As for our cost base, we had a significantly higher cost base, especially in terms of employee expenses in Q1 last year, and that figure has now gone down back to 49%, and we expect that development to continue. And one of the reasons, of course, for the change in negotiations is also to get that level to a healthier level. And last year's expenses, they were fairly high. And one of the reasons was because of the last CEO's termination agreement in February, March last year. As for personnel, we increased slightly our personnel figure in Q1. A few individual employees have been hired in the beginning of the year, but otherwise, quite a stable situation. And the main target of our future growth is to make our organization more and more efficient. We are working in all the departments, working on making our processes, the tools we use, and the performance we can do with those much, much more efficient. And we also are taking into use and have taken into use a lot of AI tools, which should improve our efficiency later on. And the distribution between R&D and customer functions is still quite the same as before. Roughly half of our employees are in the R&D department and the customer functions make up almost the other half. And more information will be distributed in the half year report later on, on August 4, '25. The interim report for Q3 will be available on 31st October '25. And otherwise, myself and the CFO, Mari Erkkila, will be available for questions. And of course, as always, visit our website for more information. Thank you.

All right. We can open the floor for questions. First, a couple from Atte Riikola at Inderes. First, about the provision for credit losses. How conservative is the new assumption? And do you see risks that you need to make more of those in the future? And are you planning to continue the factoring business under Finvoicer?

I would say that the assumption is quite realistic. As I mentioned, there's one single client contributing for a significant majority of the provision. And we see that there might be smaller increases to provision later on, but nothing close to this increase. So we will continue factoring business under Finvoicer, and we have implemented already, at the end of last year, new measures in how we estimate the risks of each customer and how we estimate the measures that need to be done after those customers and their business develops in a worse direction. But this is mainly a single event that we'll try to keep so.

Okay. Then could you open up a little bit more the recognition of additional purchase price as revenue, which was EUR 0.9 million in Q1. Is that related to Finvoicer or some other acquisition?

Yes, that's related to purely Finvoicer acquisition and that, of course, relates to the previous question as well. So there's still the other half of earnout that can be, let's say, removed after '25, but that's the part of '24, which we don't see realizing.

Okay. And still from Atte Riikola. CCO departure came as a surprise. Could you open up reasons behind that a little bit more?

Yes. As I mentioned before, we haven't seen the financing business of Finvoicer being run in the way that we want and there has been a lack of visibility in some functions. And unfortunately, we've been forced to draw conclusions after that. But that's basically the only thing I can comment on at this point.

Okay. Then about the salary increases, how big are those going to be in Q2?

Yes. Based on the local negotiations, we are looking at roughly a bit more than 2% increases based on the negotiations, and we typically do a bit higher increases ourselves. So we are looking at roughly 3% as a whole.

Okay. Then how much cost improvements are you expecting from technology transition in H2?

Yes. We are looking at -- we had the platform costs at around EUR 150,000 per month, and we expect that figure to go down to closer to EUR 100,000, and we expect some, roughly EUR 30,000, which is, of course, just the estimate at the moment, but on a monthly basis. So you can calculate from there.

Okay. Then a question from Daniel Lepisto at Danske Bank. Regarding the material change negotiations previously announced, do you expect these employee reductions to affect negatively to growth? And will there be reductions in sales personnel or customer support?

We'll see how the negotiations go and how we'll treat different functions. But of course, sales personnel and customer support as well as the whole R&D department are included in the negotiations. We expect that the negotiations or the reductions that we need to make wouldn't have a significant effect on our performance, and we try to make any decisions accordingly. And we expect to be able to continue growth going forward as planned before and to increase significantly our profitability at the same time.

Yes, that was our final question. So back to you, Alpo, for any closing remarks.

Thank you, and thanks a lot, everyone, for joining, and we'll be reporting in more detail after we have all of these major changes behind us in Q2. So happy to give more light on our business performance after that. So thanks for joining, and have a nice day.