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

Welcome to Nepa's Q3 2024 Earnings Call hosted by us here at RedEye. After a presentation by the CEO, Anders Dahl; and the CFO, Sonja Thorngren, we will have a Q&A session. [Operator Instructions] So Anders and Sonja, the floor is yours. Thank you.

Thank you very much. And I'm Anders Dahl and I'm the CEO of Nepa. And with me today, I have Sonja Thorngren, who is the CFO of Nepa. And we're going to walk you through the Q3 2024 reports and also, of course, end up with the Q&A towards the end. So this is just a quick overview, and I think we have done these presentations when we have those meetings and just to give you a short overview that Nepa is a company that helps marketers to understand the overall short- and long-term impact of the marketing investments. And we work with a tool, toolbox of our platform of brand tracking, campaign evaluation and marketing mix and modeling. And up until yesterday, we have been offering Marketing Mix Modeling as an ad hoc product, but now, starting out from today and, of course, we are piloting this for a while, we will offer this in a broader way as a continuous product, the same as for brand tracking. We work with a mode or with ambition and the thesis to help the marketers around the world to come up with actionable recommendations to help them improve their investments with clear KPIs and clear ROIs, recommendations to our clients. We serve clients in the plus 60 countries around the world and companies normally of the medium to large size, and they normally tend to have a fairly large amount of marketing media spend in different media channels. And they are normally multi-market types of companies. We operate out of offices in Stockholm, London, Copenhagen and Mumbai, and we have presence in Northern Europe, U.K., U.S. and India. But we do perform our market research and our collecting the data and do brand tracking, campaign evaluation and MMMs across the globe in more than 60 markets. Some highlights for this quarter is that in spite of the very tough market, a little bit slow market right now, we are showing an underlying profitability for the third quarter of this year that is actually the strongest since 2021, if we count EBITDA less CapEx. And I will go a little bit more into how we do those calculations and why we are judging it that way. We haven't seen an organic growth in this quarter, and it was actually a little bit slower this year compared to previous quarters, mostly based on that we are, of course, meeting some churn we had at end of 2023, but also that the restart of the market was a little bit later this year. Q3 is normally a slow quarter for us, but this year was even slower to come start again in August. But we do see some tendencies of a more positive climate towards the end of the reporting period and also going into the next period. As we reported a couple of weeks ago, we lost a major global tracking contract. And of course, we are working diligently within the organization to, of course, replace that with other revenues, but also the work on the cost side to make sure that we are meeting the net profit out of that project, but also, of course, with the cost we have compared to that. The gross margin for that project was a little bit -- for that client, was a little bit lower than for the majority of our brand trackers in the group, 55% compared to an average of 75%. So of course, that shows also that this was kind of a legacy client that we have worked hard with to improve profitability from. As reported in the previous quarterly report, we have seen -- we have performed high activity in our sales and marketing department and actually, did a full rebuild of the sales and marketing department with new people coming in and are much more focused on a professionalized and a systematic approach to sales and marketing within Nepa. So we have really invested in strong sales candidates and as shown, of course, to prove activity and results and we see encouraging results so far and especially, towards the end of this period, we see a positive trend shift. Key highlights after the period ended that we launched this actually out today, we sent out the press release and activating our marketing programs, our cMMM, our continuous Marketing Mix Modeling product. And this is in addition to the already existing marketing mix products that we have had for a while, which is an ad hoc product. But this new product is a continuous product that will work in the same way as our brand tracker that we are constantly measuring our clients' marketing activities. I will go a little bit further deeper into the MMM a little bit later on. We also have announced yesterday that we have appointed a CTO, Jakob Kofoed. He brings a wealth of experience in this area with more than 20 years in this industry, and especially focused on building products and very much engaged in the Marketing Mix Modeling and community more or less globally. And he has also worked with large clients across the globe and has a strong background in moving organizations from maybe a tendency for a more customized consultancy way of working to a more product-driven organization. We have sent out the Notice of an Extra General Meeting, November 19. And that is to elect an additional Board member, Ludvig Blomqvist. That decision is supported by the majority owners, so the majority of the owners in the company, representing more than 55% of the ownership in the Nepa. And also, we also announced that Sonja Thorngren will step down as CFO of Nepa, and we are in the middle of that process of finding her replacement. And this is a graph just illustrates a little bit the impact on operating results when it comes to a higher period of higher CapEx and a period of lower CapEx and also how that impacts adjusted EBITDA, if we reduce the CapEx and take that in full consideration to have an apples-to-apples comparison. This is not because we have -- as you see, we have lowered the CapEx numbers. And this is not a result that we are developing less. We're actually developing on the same level. But since we have seen that, we are much shorter periods between an idea and the stimuli or an input from the market or a new feature or a new product, we took a decision during late or mid-2023 that it makes more sense to take these costs as a cost directly into the P&L. And in order for us to get -- kind of to have comparable numbers, this is the way that we're showing this, that this is an underlying strong hold on profitability improvements, and we have seen those improvements over time, but we wanted to make this comparison and also have a much clearer way of reporting our numbers. So over to the financial review. Sonja?

Thank you, Anders. And as Anders already said, we have come a long way when it comes to efficiency improvements. So with all the initiatives that we launched a year ago and have been very tenacious about during this year, we are now able to operate in an improved and more controlled project profitability as well as a significantly lower cost base, which shows a decrease of 20% year-on-year when it comes to our personnel costs and our other operating costs -- or other external costs. During this quarter, we have also deployed AI tools and that -- which are helping us also to further increase our efficiency. And we are also leveraging our global resources in a more cost-efficient manner, which is also helping to improve our efficiency within the company. So although we do see a decline in net sales, which is coming from where I have mentioned it, it's the market, it is the past year's churn combined with a slower start after the summer period, we are able to and continue to deliver strong underlying profitability. And we are also producing SEK 5 million on our free cash flow in the quarter so positive from that sense.

Yes. Thank you, Sonja. And just to continue the discussion on AI. This shows that we have worked with AI for quite some time, and this is showing our promising outcomes that we see, that these are kind of the 4 core areas. The one to mostly the left, number one, is an AI tool that we're using as a quality score in our forms, in a way of collecting our service or live in survey in order to make sure that we have the right people in the service and that we are actually excluding and kicking out bots and link farms and have the highest quality into our systems. AI Trend Boost is not a synthetic data tool, but it's a tool to work with smaller target groups and also to have more accuracy in our target groups that we are working with. And per se, it will actually help us to increase sample size without actually buying more data. Open-Text AI, and then talking about number two, the AI Trend Boost has also been recognized by leading organizations like SMR, for example, where we have done this project also together with Meta, which is a good sign that this is something that adds significant value to the way of being able to read out on smaller sample sizes on top of groups. Open-Text AI is a tool to analyze and identify clusters and key themes and actually, being able to dive into the data in a more efficient way. And then a couple of months ago, we have launched a fairly broad AI initiative across the whole organization that we're building in our platform together with [ Zama ] to help ourselves to find -- to get better access to all the data we have, so we can get better data, better access to all the work we have done, but also to automate and stimulate and learn from processes like in sales training and in client presentations, in meetings and in follow-ups. So this is, of course, a focus on -- a majority of these are focused on decreasing costs to increase efficiency, but also to create new products and create more client value. AI Trend Boost is definitely a product that we are selling to our clients as a new revenue stream. And as of today, we are broadly launching our continuous Marketing Mix Modeling. And we have been doing Marketing Mix Modeling for quite some time as an ad hoc solution. And what Marketing Mix Modeling is, is a way to collect all the clients' marketing activities and data, and with our tool, help them to kind of optimize and create a more efficient way of using the resources, all the way from media planning to content to sender recall to make sure that you're actually communicating in the best way to your target group, to efficiency and timing depending on external factors. So this is a tool that is customized, in some extent, that we actually are tailoring towards the clients' data sources, and that is the setup time that we need to do to calibrate the tool. But then it actually runs in a very standardized form. So the overall platform is standardized, but the way of setting it up is tailored and which is very unique because there are a ton of MMM solutions in the market, but the way we are selling our MMM is unique in the industry. And we have already been running a handful of pilots and we see some very strong results, with an uptick in double-digit improvements in ROIs, return on investments, but also significant cost savings and revenue increases for clients that have been through those pilots. So it is a strategic and a tactical tool. It's dynamic, and it's definitely a real-time tool that will help our clients in a never ending or an ever-increasing data-rich world, and we will definitely help them to navigate in that world. This is kind of -- I wouldn't say the crown jewel, but the final piece of this marketing optimization suite that we have been building for a while, with brand tracking, campaign evaluation and cMMM. So this really creates now this kind of full picture within the same platform for the client to be able to access all this information in an ongoing basis and being able to make the decisions in a very efficient way. And we are convinced and we have seen that from clients that this is also a great tool for an inside department or a marketing department to actually have KPIs in a way to show the finance department, the CFOs of the world, the CEOs of the world, how you can kind of justify your investments in your marketing in a new way. It's also unique because we are not a media industry. We are not buying media for our clients. So this will, of course, help the client to have an educated discussion with our media agency, how do we optimize our media, can we reduce, can be move to other channels, but also to the creative agency that they work with. How can we change our upgraded content, how can we better to make sure that the audience is actually understanding that it's us and that the message should actually come all the way through. So this is a really strong combination. It's a really strong platform. And like I said before, we have already seen a ton of -- a lot of interest in the market for this combination and for the product of cMMM. We continue to be professionalized, our sales and marketing department, so, of course, we are growing our ambitions. We're not going to -- we have kind of hired the number of people we need for now and then -- but we are looking at how can we be more efficient all the way in the sales and marketing team. Like Sonja said before, we continue to increase our internal efficiency. And I think you've seen that also from previous reporting that we have been very prudent when it comes to looking into the cost side and making sure that we're keeping a tight control. And also since we did kind of the reorg and are now more of a one Nepa and really works together, we can utilize resources across the globe, but we can work much closer between our offices in Mumbai, Stockholm and London and Copenhagen. So if we see that there is a need for anything in any of the offices, we can utilize resources across the globe in a totally different way than before. And also with Jakob now onboarding as the CTO, we have done a great job, and the team is great when it comes to moving into more of a product organization on the tech side. But with Jakob's coming in, we will have an even clearer path to concentrate development and make sure that we are developing the tools that are actually driving us towards more of an ARR business to go from more 55%, 60% to hopefully a much higher number and also being able to deliver products that are actually a great fit to the market and not only focus on internal efficiency and processes. So how to look into the future, market demand remains cautious. We still see that there is a little bit of a wait and see. And of course, like I said before, with the loss of that contract, we are, of course, moving -- working hard to find ways to reduce cost and continue to keep profitability on the same level. And, of course, reduce for or compensate for the loss on top line revenue as well. So the long-term goal is still to drive profitable growth and a profitable business. And again, keeping tight control but also being able now to push hard on the sales and marketing side to go back to more of a growth mode than we have done and been in before. So that actually summarize my comments, and I think we have 20 minutes and we are on minute #17 now. So I think we are -- kick off the Q&As.

Thank you very much, Anders and Sonja, for the presentation. We actually got quite a few questions here and kind of specific questions as well from our viewers. So let's start. I was reading your CEO letter and that you said that you see some positive trend shift in bookings. And I just curious, is that confirmed -- I mean, referring to compared to the summer month or compared to the pre-summer month? I mean if you adjust for -- adjusted booking developments.

We aren't reporting any of those numbers yet, and we're not reporting them at all. But as you compare to previous year's months, yes, we do see an uptick month to month, September, October to previous years. So we do see it, but we also see an uptick in the interest from all our marketing activities. And like we have said before, we haven't really done a lot of marketing activities previous years. But now, we see that the marketing activities we do are getting kind of the results we're looking for when it comes to response rate and qualified leads. And then, of course, at the end of the day, we need to show those -- that the interest and the conversions and the discussions and the proposals are turning into sales. And that's for the future.

Okay. Good. So let's dive into the questions then. And I want to start off with, you announced in September that you lost your biggest client. And the question is, we understand that the contract was on your legacy IT platform, which required a lot of manual handling due to complexity of delivering to a number of countries. Is this correct? And could you describe if this involves higher operational costs compared to standard brand tracking contract?

Yes. As you see from the gross margin comparison, our average is normally 75%, this one was 55%. Of course, there is a lot of customization and legacy setup in that setup. But we have been working over the years with improving that. So the way to meet something like this is, of course, to work with the cost in general. But then, of course, you have a net profit coming out of that deal anyway, even if you have a lower gross margin. So we still need to kind of look for other ways to improve efficiency within the organization. Even if you're kind of moving away that legacy technology solution, you still have some cost to work within the organization. And we have identified and we are working with them in different projects across the board, and they will be addressed in due time. And then, of course, I think the best thing is, of course, to replace any lost revenue with new revenue. So that is the fourth ambition; in a controlled way, to go for that revenue also in a more profitable way, to really look for profitable growth and not just replace this revenue with another, for example, but actually try to get a new ARR and new continuous revenue. So it's a combination. Work with the cost side, make sure that we're moving out some of that legacy technology and then, of course, do what we can in order to improve top line.

So when do you expect to shut down this older legacy platform? I mean the contracts ended in Q1 next year, right?

Yes, but we are still running. On parts of our legacy contract, we are still -- legacy platform, we are still using some CX solutions, customer experience and customer research, customer survey solutions, and they will continue to be running. But we have found ways with new technologies to actually run some of those legacy platforms in a more efficient way. Like I said before, we're also using a lot of international resources, some of the development or some of the maintenance of some of our legacy components are being done out of Indian houses. So we have been able to kind of be more efficient in all those aspects of what's called kind of the legacy part of the platform. But all new developments are going into the new platform.

Okay. So the legacy platform, it will continue to be used after first quarter of 2025, then?

Yes, it's going to be run but in a much more kind of controlled way and in a more cost-efficient way.

Okay. But can you say how long you will run it? Or, I mean, what I'm after is if there's going to be any additional cost when you close it down?

No, no additional cost for closing it down. We have good revenues coming in on that platform today. And there are ways to kind of manage and monitor. So we don't really see any additional cost or any cost that is out the ordinary to replace or close down that legacy platform at all.

Okay. Can you touch upon the delivery differences when you provide brand tracking on the new platform compared to the older one?

It's a much more streamlined pipeline and process the way that we're delivering it. And we don't have so many customized solutions when it comes to -- like we did before. So the new platform is much more streamlined, modern technology, better user experience, new tools for presenting, new tools for analyzing. So it's a more efficient way of delivering to the client. So it's actually a net-net, more efficient way for us, but also a better client experience.

Okay. You talked about it before and I'm going to ask this one. I don't think you're going to answer it, but what does your pipeline look like for onboarding larger potential clients going forward?

We don't comment on that, and we don't have a good way to describe that yet, but -- so no comment on that.

Thank you. So let's move on to the Marketing Mix Modeling, kind of specific questions here. So I'm going to read them straight to you. You previously mentioned that you plan to launch your subscription solution in Q4 after running it with 2 demo customers. When do you plan to launch? And do you expect to onboard new customers from the start?

Yes, it's launched today actually. What a coincidence. So it's launched today, but it actually have been launched for a while with a handful of pilots actually. But we have been running on the continuous MMM. But before that, we have done ad hoc MMMs for quite some time. So yes, it's launched now and it's a proven model. It's a proven technology, and it's very much in line with the way that we have been serving our brand traffic clients, the same kind of business model.

Okay. And is it still the case that your ARR revenue at the end of Q3 contains 0 Market and Mix Model revenue and that all existing MMM revenues is included in your ad hoc revenue? You talked about in your presentation, but can you clarify that?

Yes. So the ad hoc MMMs previously, what continues, have been recorded as ad hocs and the pilots we have done have been recorded as ARR. So going forward, all the continuous MMMs will be recorded as ARR.

That's good. That was my next question. So I skip that one then. And the next one is that the -- our understanding is that the gross margins are very high for this product since you don't need to purchase any panel data. Could you share more about how the dynamics differs from your other subscription models?

It is exactly what you said. We're using a lot of the clients' data, sales data and then media spend, et cetera. Our normal brand tracker, for example, we do have to put in -- collect interviews and build them into the model. So this is a bit of a different model. So the difference is that the setup time is a little bit longer because, like I mentioned before, we are tailoring this for each and every client based on their sources, data sources. But the ongoing management is cost efficient, and it's a high gross margin product because we don't have to buy any additional data.

Okay. And the next question here is, does the ARR MMM model module lower cost for delivering the MMM ad hoc projects? And has development of ARR MMM created OpEx cost savings even before Q4 2024?

No, it's a larger setup cost, but narrow to that question. Once up and running, the data cost is 0. So that would be the biggest difference, like I said before, versus the brand tracker.

Okay. You didn't release any information about customers who have signed up for the continuous MMM in the report. Do you currently have any customers signed up? I mean I recall that you have, right?

Yes, we do.

And will this show up in the next quarter? I mean, Q4? Or is it going to be longer?

If it's going to show up with the clients' names or if it's going to show up with revenue? What was the question, names or revenue?