Nepa AB (publ) (NEPA) Earnings Call Transcript & Summary

Welcome to Nepa Q4 2023 Report Presentation. [Operator Instructions] Now, I will hand the conference over to Interim CEO, Ferry Wolswinkel and CFO, Sonja Thorngren. Please go ahead.

Good morning, everyone. Thanks for joining, and welcome to Nepa's presentation and conference call of the year-end report 2023. My name is Ferry Wolswinkel, Interim CEO and Acting Head of the commercial organization. And with me today, I have CFO, Sonja Thorngren. Before I dive into our Q4 report, I'll just give you a brief background for those less familiar with Nepa, to what we do. We help marketers and insight professionals measure and optimize the impact of their marketing activities and enable our clients, through unique insights and advisory to build stronger and sustainable brands. We optimize for short and long-term effects of marketing efforts to continuously lower customer acquisition costs and improve our clients' ROI. We turn data into growth opportunities by combining technology, data and advisory. Every day we track and measure the impact of marketing activities for 7,500 brands across 60 markets. Q4 in summary, we had a good ending quarter to 2023, with positive momentum in our core markets. These grew by 6.2% or 3.8% organically. Throughout the year, we have been laser focused on restoring profitability. The concerted efforts of our teams and diligently working on our KPIs have steered us toward this goal and as a result, we have made substantial progress on that way. We saw a strong project margin trend in the quarter to significantly better levels with an all-time high in Q4. This is a result of the reduction in headcount, efficiency improvements and our pricing and packaging initiatives that we launched in Q3. We completed the cost savings program in the quarter, which resulted in savings beyond our targeted cost base of SEK 220 million and restructuring costs of SEK 3.3 million. Throughout the year, we have scrutinized all our operating costs, resulting in efficiencies and new ways of working, enabling us to operate more efficiently. Moving forward, we have a more dynamic approach to our cost base, aligning tightly with the performance of our business. When we started our savings program, this led to more internal focus and we anticipated that this will have some negative effect on employee morale and our business. We made every effort to keep these as minimal as possible, and I want to thank our fantastic colleagues who gave it their all in this difficult time. As expected, though, we experienced lower retention levels during the fall. And despite a very good quarter in terms of new ARR sales and upsells, it did not offset the churn. ARR declined in total by 4.1% year-over-year to SEK 164 million. During our review of the whole group, we encountered accounting errors for the Nepa APAC subsidiary, spanning the period of 2019 to 2023. These included incorrectly recognized project revenue and costs without basis of project completion, invoicing or payments. The subsidiary has been subject to local audit, but due to inadequate internal control of the operation, the accounting errors had not been discovered until then. The correction of the errors, including revenue reversals, data cost reversals and provisions for the bad debt, impacted the results in the fourth quarter negatively by SEK 2.6 million. As a result of this, together with the subsidiaries, suboptimal alignment with the group's overarching strategic objectives, we made the decision to concentrate our efforts on our core markets and close down the APAC sales office in India. It has accounted for less than 3% of the group's net sales and other impact results. This closure has nothing to do with our Indian Global Research Lab, which is operated from a separate entity and is a well-functioning production unit. Now, I'll go over the financial highlights for Q4. As I said, we had some good momentum in our core markets in the quarter. Subscription revenue rose by 6.5% to close to SEK 45 million. Ad hoc revenue from subscribers declined, however, 13.6%, and is a direct result of lower ad hoc project activity from churn subscribers that also paused or discontinued their budgets for one-off projects. Having said that, we did see a positive uptick in new projects from non-subscribers that offer potential to be converted into future subscribers. Ad hoc revenue from non-subscribers increased 10% in the quarter, albeit from low levels. As you can see under eliminations, you see the net effect after revenue reversals in Q4 on revenues from Nepa APAC. All in all, reported net sales declined by 2.2%. We achieved a strong gross margin of 79%. This was partly driven by data cost reversals from Nepa APAC, that decreased our overall data cost and partly by rebates from our data suppliers. Excluding these factors, we are comparably better off than we were in Q4 last year as we've also increased our prices and made margin improvements throughout the year. In total, we had items affecting comparability of SEK 5.9 million, SEK 3.3 million of those are attributable to restructuring costs and from the cost savings program, and SEK 2.6 million from the correction of historical accounting errors and provisions for bad debt in Nepa APAC. Adjusted EBIT amounted to SEK 5.2 million with a margin of 7%. 2023 as a whole, reflecting back on the year, it's been a year that presented us with significant challenges and some tough decisions. I'm proud of our collective achievements, and I'll share some more context on this. In the first half of the year, we grappled with a decline in sales trends, particularly among non-subscribers. In total, ad hoc revenue from non-subscribers experienced a 33.2% year-on-year decline. However, through focus and hard work, the sales trends started to reverse and stabilized in the second half of the year. Our focus on ARR and clients paid off, and revenue from subscribers increased. Unfortunately, it wasn't enough to fully offset the non-subscriber decline, and despite our efforts, we experienced a slight decline in gross margin. This was noteworthy given our increasing share of subscription revenue. The silver lining lies in the scalability of our subscription model. While it demands more data, it also offers greater efficiency in terms of resources and project deliveries. Throughout 2023, we undertook substantial cost-savings initiatives. These efforts resulted in items affecting comparability totaling SEK 13.8 million. Our restructuring operations were thorough, ensuring we optimized our processes and streamlined our financial operations. Our adjusted EBIT stood at SEK 0.9 million. And as we move forward, we remain steadfast in our pursuit of sustainable growth and profitability. In summary, our year has been marked by resilience, adaptability and teamwork, and I'm confident that our collective efforts will continue to steer us in the right direction. Throughout the year, we've done a lot of work with our sales organization and increased our focus on serving new subscribers and increasing the scope of many of our current subscribers, including new add-on modules launched during the year. Our efforts in building more ARR pipeline paid off, as we started winning more new subscription business in the quarter. Most of these contracts are sold with standardization, following our pricing and packaging initiative. And we are set up to deliver all new projects more efficiently than previous ones. While we have lost some clients and more smaller ones as a response to the economic situation, we are slowly adding larger ones to increase the averages. The average subscription revenue per subscriber during 2023 rose to SEK 1.41 million, up from SEK 1.29 million in 2022. We also increased our ad hoc revenue to those clients to slightly SEK 0.5 million per subscriber on average. But again, despite these positives, our sales average did not offset the lower retention levels during the fall. Industry-wide budget constraints and reorganizations amongst our clients, coupled with an internal focus on restoring profitability and loss of employees has had a negative impact on client retention in the quarter. We are addressing these challenges through strengthening client relationships, targeted campaigns and continuous improvement on the value we deliver. The churn in the quarter rose to 6.1% from the historical average quarterly of 1%. In total, ARR decreased to SEK 164 million. So the big challenge for 2023 was reacting to the weakening market with an expanded cost base. And in response to the challenging market conditions we faced in the beginning of the year, we implemented decisive measures to adapt and restructure our business. We initiated and completed comprehensive cost savings, including a big reduction of headcount. We optimized our internal processes accordingly and aligned our focus on our core markets. These decisions are never easy, but they were necessary to streamline our organization and swiftly respond to changing market dynamics, positioning ourselves for future profitable growth. Today, our cost position is in a far better place and we've entered 2024 with a significantly lower and more structured cost base that we are working with more dynamically moving forward. Due to the successful implementation of internal efficiency improvements, we have returned to far better project margins. In 2024, we will continue to focus on running a profitable business, with focus on ensuring project profitability from price and packaging to delivery. Besides profitability, however, we also strive for growth, which includes rebuilding and strengthening our sales and marketing efforts. We focus our investments on larger markets such as the U.K. This is where we see bigger opportunities for exponential and sustainable growth. We will continue to deliver on our product strategy and enriching our subscription offering, and ultimately driving new sales while fostering high customer satisfaction and profitability. This was all from us. Thank you for your time, and I now welcome any questions.

[Operator Instructions] The next question comes from Jesper Von Koch from Redeye.

Thanks for the presentation. Just want to go into the -- on the kind of the more slim organization that we now have. And it seems -- and it is obvious that you've down-prioritized customer delivery in some cases like leading to increased churn. But look, what is your view on how sufficient the current organization is for customer delivery?

Yes. Thanks, Jesper. Yes, we had to adjust. Of course, we have to serve a large number of customers with a smaller group and had to prioritize in that way. So as you can imagine, the new ways of working that we implemented throughout the quarter takes some time to really take full effect. So, I'm very confident in where we are today in terms of adopting these new ways of working. And I must say that every day, we are getting better. I think I'll be too optimistic to say that we're fully there, but I'm pretty confident in how we are progressing and how both the sales teams and our client teams are working together in a different way to, again, ensure both client retention and more efficient collaboration on upselling on our existing clients.

All right. And I mean, you previously indicated that you try to use your personnel between markets rather than only on like a different individual markets. So, how is that developing?

Absolutely. And that has been a great help in the situation that we were in. So, we have definitely benefited from resources in other markets such as the U.K. and Finland when resources were needed more in Sweden and vice versa. So, I think the decision we made back in last year to have a more global organization. The teams are more adopted and onboarded into these cross-country teams. And it's, yes, showing real resilience in being able to make more effective use of our resources.

All right. Good. And then just going into the OpEx or the actual -- or the total cost base going forward. I mean, you say that you've finalized the cost savings like in the quarter, but then you chose to close down your APAC office. So, I guess like that means even lower cost base than previously. But then you say that you also aim to increase your investments in sales. Could you just like try to elaborate on your thoughts on the total cost base, like if you compare like Q4, Q4 except the one-off costs with like the runway going forward?

Yes. So firstly, the decision to decide to close the APAC sales office, as said, this was partly due to these historical accounting errors, as well as our more strategic focus long term. And yes, that does mean that our cost base for the year will reduce, but at the same time, our top line will, of course, be impacted by closing down that business unit as well. So, we are partly repurposing some of those costs to invest in sales and marketing, where we believe there's a better return on investment. Our cost base, yes, we overshot quite a bit to our [ SEK 20 million ] targets. So that's very positive. At the same time, you have to look at it in relation to the business, of course, and this is now a much more flexible number that, of course, adjusts based on the performance of the business. So, I don't think it's very helpful to give you a number that could change month-over-month depending on the performance of the business. But we have a much better and much faster way of responding to business, whether that's in growth and increasing our investments or turning down our investments.

And what does that mean in more concrete terms, being more flexible, both up and down? Do you have like your own internal cost base? Is that kind of much lower? And then you have like some consultants, both like on the delivery organization and sales organization on top? Or could you just -- yes, I'm not really...

Yes. Organizationally, that doesn't really change that much. It's more that we run or we strive to run a profitable, positive cash flow business where the investments that we're making, keep that in mind. So, again, when -- in a scenario where, for example, churn would get worse, we are really quick to act on those kind of trends, vice versa, where we see that our efforts in, for example, the U.K. are really picking up steam and that allows us to grow without dipping into cash flow and to go into negative territory. That's kind of what we mean by that. So it's not necessarily changing the organization in that sense, but more adaptable to how the business is performing.

Yes. Okay. Not something like my way is the highway and yes, I will use this cost base no matter what. Yes.

Absolutely no. No.

All right. Good. And I think in the presentation, I mean, you indicated somewhat because you increased ad hoc revenues to non-clients. Have these led to new subscriptions?

Yes. It means that doesn't go that fast because when we win these new projects, of course, we have to also deliver on them. And the focus in the short term is more on those projects themselves. However, we have a clear kind of customer journey and where the opportunities are, we kind of work with the clients. They typically also present opportunities to prove ourselves and deliver the value. And that tends to increase by either new projects or at times to upselling to subscription business. So it's different from client to client, but they typically take a little bit more time to see the effects of that.

Okay. And then like in the last conference call, you indicated that your MMM product will become -- like offered as a subscription offering quite soon. You indicated like Q2/Q3. But is that still on? And also, what response do you see there?

Yes. So, we definitely still aim to scale that. And I must say I think Q3 is a safer bet to make right now. But again, we have made a lot of progress with our pilot customers that, as mentioned in our last call, are working with us on this solution. And it's more kind of working on what the scalable solution will look like. Because as you can imagine in these pilots, we get a lot of feedback. We learn a lot from them. Of course, we have to keep in mind our competition as well and we are assessing where we can best invest to develop a scalable solution that the market really wants and not having to iterate too often from the get go.

Okay. And then also like on the same theme or same as like upselling and so on, the other products such as the AI Trend Boost and some more. How is that like proceeding? And how scalable do you see those like -- those sales processes being?

Yes. We have achieved some successes already with both, AI Trend Boost and as well as our packages that I covered in our last meeting, where we have more standardized prices and packages for different client segments. And yes, we see that now converting in new clients with much better margins. We definitely can still do better. So, we're still working a lot with both the sales go-to-market and client teams to get more clients aware of this. And I think particularly for AI Trend Boost, I think it will, in the future, be a critical component in differentiating ourselves for new pitches, as well as making it part of our offering for certain more premium packages as part of our solution. So, it will just make our offering much stronger. And with that, our expectation is that it will also improve our retention.

Okay. Good. And then just one last about -- I mean, in the last -- yes, I guess since the beginning of October, a new like a major shareholder has emerged, now owning more than 20%, I think, of the outstanding shares. And I guess that later today at the Extraordinary General Meeting, we will like get to know who that is. But have you like received any kind of like indications of like what the purpose of that shareholder's ownership is?

Unfortunately, I can't really share more than I think what we will find out today in the EGM. So, I don't think I have any useful or relevant details, yes, that I can share or more than you know. So, I think we'll have to wait until this afternoon.

[Operator Instructions] There are no more questions at this time. So, I hand the conference back to the speakers for any closing comments.

Thanks, Jesper, for your questions. In summary, last year was a tough year, a tough year where we, yes, had to make a lot of changes to our business. But I'm extremely excited for this year. We've gone through the difficulties and it's now really following through on what we implemented and rebuilding and strengthening our teams. For the ones who are joining this afternoon in the EGM, I look forward to seeing you there. And yes, thank you all for your time.