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

Welcome to Nepa's earnings call for Q4 2024, hosted by us here at RedEye. We will start the presentation with Anders Dahl and the CFO, Filip Tottie with the presentation. And then afterwards, we're going to have a Q&A session. [Operator Instructions] So Anders and Filip, go ahead.

Great. Thanks a lot. We will start the presentation by giving an overview of who we are. And thank you all for attending this presentation. I think in an even more changing world when it comes to marketing challenges more information, more touch points, more media and more complex media landscape, what we do is to help marketers, CMOs and inside directors to navigate in this challenging world. So we provide data. We provide insight for growth. We provide reports. We provide dashboards. Our main offer is brand tracking, campaign evaluation and MMM and now Continuous MMM as well that we launched towards the end of Q4 of last year. Those 3 products are delivered in platforms as subscription products. And then on top of that, we had a lot of extra services like ad hoc services and other services to drive growth, inside growth. We serve mid- to medium-sized companies around the world, and we operate with a head office in Stockholm, but we operate globally with presence in most markets around the world. Looking at some highlights for the numbers in '23 to '24. In a challenging market, we have delivered a pretty impressive growth in adjusted EBITDA less CapEx plus SEK 20 million from minus SEK 8 million to plus SEK 12 million in adjusted EBITDA less CapEx. When it comes to net cash flow, we have seen a pretty significant improvement as well from pretty significant minus to plus SEK 3 million in net cash flow for the year of '24. Other things that in this transformation process during 2024, we have definitely refined and changed our sales and marketing strategy with an improved organization and a global delivery model. Filip is one of the new additions to our leadership team, so an improved leadership team with a new CRO, a new CTO and a new CFO going into '25. So with that said, I would hand over to Filip for some financial highlights from the year of 2024 and starting with the Q4 2024.

Thank you, Anders. Yes, I will run through the Q4 performance of Nepa, and I will start by gladly saying that we managed to increase our ARR from Q3 to Q4 by 1.5%. And that together with 0 churn during the quarter as well a very low downgrades during the quarter. We managed to improve our net revenue retention to 101.2%. So really solid ending of the quarter and year. We also saw really good momentum in our new business team who closed more deals than they usually do during a quarter. So nice ending of the year and quarter for those 2 areas. However, the market out there is challenging for our customers, meaning that they pause or delay some of the investments with us. Meaning that, that's affecting our top line. But despite declining net sales, we still managed to deliver a healthy gross margin at 74%, much thanks to our focused efforts on improving the profitability of our projects. Our bottom line, which we measure as adjusted EBITDA less CapEx was positive SEK 1.9 million slightly below last year, but primarily due to our targeted investments into marketing to build a foundation for growth. We also saw a significant improvement in cash flow increased to SEK 11.2 million for the quarter. So we are in a very healthy financial situation, and the Board proposes a dividend of SEK 1.23 per share which is equal to the previous year. Over to you, Anders.

So with the improved and changed management team, we have seen a lot of focus on profitable growth, starting with recruiting Sara Nyman as our new CRO in Q2 of last year, and then adding a new net sales team towards the end of 2024. So that by itself will kind of improve activities, improve sales and we will show a couple of evidence of the new logo initiatives and the new sales initiatives. I think Nepa has always had a very strong business model when it comes to kind of delivering strong insights to the market. But now with the totally different sales focus and marketing focus, we see a change in how we actively can be in the market and sell our products. We launched a Continuous MMM in late Q4. We had a big client event in Stockholm in December of last year. cMMM is actually a continuous development of the product we have had for a while, which is Marketing Mix Modeling, we launched that several years ago, but that was sold and delivered as an ad hoc solution. And Marketing Mix Modeling is really a product that can encapsule all the different marketing and media activities that the client can do, so that by itself drives us to a little bit of a different position within the client's organization. So with launching cMMM, which is a Continuous Marketing Mix Modeling, we can always be active, we can always be proactive with the clients and not only provide research and historical data, but also predict and look into the future and help our clients to plan their media and marketing efforts. And that leads us to talk to more than just the inside department but also expand into marketing departments, talk to CMOs, talk to CEOs and even CFOs. We're looking over our total tech stack, and we're going to come back to that in 2025 to talk more about tech development and streamlining our tech stack and be more relevant in the new tech landscape. We know that our clients are investing a lot in tech. We know that performance marketing drives a lot of marketing tech, martech and ad tech. I think research tech has been a little bit on the back end. So now we are developing a more streamlined approach to our whole tech stack. And we're going to talk more about that later on in during the fiscal year. Ludvig Blomqvist was also elected as a new Board member during 2024 and Filip was appointed as CFO during early 2025. The restructuring offers and efforts in the U.K., that we launched now during early phase of 2025, will give us an estimate annual cost saving of SEK 8 million, rolling -- or in the financial year of 2025, I think we'll be around SEK 6 million in cost savings for 2025. Key initiatives, Filip, in 2024 when it comes to sales, and this shows a little bit more on a quarterly level the changes in adjusted EBITDA less CapEx.

Yes, I think this picture clearly illustrates the commitment of driving a profitable company, and we have done so now over the last 5 quarters. And you can see the significant year-over-year improvement with more than SEK 20 million which is quite impressive. It shows the dedicated efforts of the management team and all our teams.

These are a couple of examples, 2 examples of the good momentum we see in the net new logo team, the new business development team. New clients [ Avanza ] and Haglöfs, we signed them late 2024 for the brand tracking product. And that also shows that the new approach of driving in new customers and in brand tracking but also the efforts of the team to kind of find clients that are maybe not the traditional inside buying clients that we have normally pitched on, but also challenger clients that hopefully we can grow with and develop from our product perspective, not only with the brand tracker, but also additional products and services to these clients.

Right. So we talked about Q4, let's take a step back and look at the full year performance. And as I said, there's been a negative macro environment for our customers, making them pause or delay some of the investments with us, obviously causing a negative effect on our revenues. However, despite this decline in net sales, we still managed to deliver a very good gross margin of 75% for the year, again, coming back to the focused efforts on improving the project profitability. We have also implemented and launched several cost-saving initiatives that you can see had a quite big impact on our operating costs, which are significantly down from last year. All this brings down -- this brings us down to the bottom line, which is a significant improvement with more than SEK 20 million year-over-year. And we have seen an even better improvement in net cash flow with more than SEK 28 million. So this shows that we can drive Nepa as a profitable and cash-generating company.

Right. So priorities and expectations for 2025. And I think one very important aspect to point out in this cost kind of reduction, cost-focused aspect is not -- we're not only looking at possibilities to be more cost efficient, but also looking into new ways of working. And I think we started that already in 2023 by looking at net contribution on a project level and driving the organization in a different way, utilizing that we do have presence today in several markets. We have a big production unit or a big unit in India, for example. And we are now looking at ways to be looking at, we are actually implementing and transforming our ways of working with our clients. So with the restructuring in the U.K. to be more efficient in the U.K. leads to a cost reduction when it comes to annual cost, but it also leads to a new way of working. So we are expecting or planning or we're already seeing that because that is already underway that we can continue to serve our clients in exactly the same way as before, even more efficient. So that is a combination of global processes, new technology, we're using AI in a very high extent in order to make sure that we can utilize the efficiency gains out of using AI. It's an operational tool, but also as a tool in our products for us analyzing the data, working with the data in a new way. We have also rolled out in the early days of 2025, a new client-facing organization that is much more client-centric, that we are merging to previous departments into one department, so they're going to work with a very clear client responsibility, both in regards to grow existing clients, but also to make sure that those existing clients are not churning and of course, delivering an improved net-net contribution. So the separation of existing business and new business has already shown out to be very successful in driving new logos into the business, so total clear and very outspoken focus with these 2 different teams. Of course, we are back into growth focus, and I think 2024 was very much of an evidence of that we can continue to drive and be more efficient, keep our cost but still being able to deliver a strong improvement in EBITDA less CapEx and net cash, but it also shows that we can kind of grow into a new market or a new year with an ambition to grow the top line. New logos towards the end of the year. Q4 is ending on a good note when it comes to bookings. We know that we have some preannounced churn that will show up in the beginning of 2025. But of course, we're doing everything in the back orders of 2024 and going into 2025, to work with everything we can do in order to improve top line but also to continue to be more efficient on the bottom line. So with that said, I will hand over to the Q&A section.

Thank you very much for the presentation. So let's get into the Q&As. I want to start off with the following up on the sales. I mean we talked about it last quarter, Q3, and your focus is, of course, on sales. And I mean, organically, it was down by 5.6%. The ARR was also down year-on-year 1% to something. But you saw 1.5% uptick...

Quarter-over-quarter.

Quarter-over-quarter, yes. So tell me about that, what do you see?

I think that is an evidence to the increased activity level. I think both in the way so that the way we have organized ourselves now, with having a clear team working on new business and one team working on the existing client. And not only that, we have also started to drive top line marketing in a different way than we have ever done before. So with the new brand positioning, with that client event that we had when we launched cMMM, for example, that was the kickoff to a new profile, new brand and we're going to talk more about that going into 2025, but it is a clear ambition to drive more leads, be more better to convert those leads, look into what do we spend in marketing, the same things we are preaching to our clients. I think we need to live the same way. So I think Nepa has always been very good at developing and working with existing relations. So we are still very good at that, and we're going to continue to be really good at that. But we're also going to be exactly what we tell our clients to be, more aggressive on the customer acquisition side and really drive growth towards new. So activity level is very high. A couple of very clear evidence that they are converting to clients. I think the whole cMMM leads to that. We have a much broader palette to talk to a higher up in the organization, CMOs and CEOs and CFOs. And even in times like this, when there is a bit of a hesitation in market, should we invest, should we not invest, the political landscape, what's going on, I think the more insight we can give our clients to point in the direction of growth, I think the more relevant we will be in that, in boardrooms, in C-level executive rooms, et cetera.

Okay. And what do you see customers opting for? Is it an hoc projects or cMMM or MMM?

Normally, when you talk to a client, you normally start with, of course, understanding the client situation, what are they looking for? I think cMMM or MMM in general, is a very hot topic right now. So because people are -- the number of media outlets, media channels are just increasing. The data points are increasing. Of course, you want to understand. If you leave your kind of digital world from a very clear tech stack, you understand your martech, you understand your conversion, your performance marketing, what about if you move into retail? What about if you start doing brand advertising? How do you understand the impact of those different activities? So when we go to challenger companies, traditional e-com companies, for example, talking about MMM could be a good starting point to say that we can actually help you to understand, give you a holistic view of your investment. That might lead to that, we start with the brand tracker or kind of an ad hoc project or something else to give some kind of a land and expand strategy from a sales perspective. But the ideal dream client is, of course, someone that really understands the impact of track your brand, really understand your brand equity around health, work with the campaigns to understand your short-term impact of what you spend when it comes to driving sales, and then use MMM in order to kind of navigate play with the whole -- all the keys on the piano and really understand exactly what is the incremental impact of doing more or less advertising, short and long term.

And how much are clients asking for your device choosing different products?

That is the sweet spot for us. I think the people -- again, those results that we see now from last year and the improvement is driven by a very strong organization, underlying extremely smart people, a lot of data scientists, a lot of analysts, a lot of good people, product leading, the clients, holding their hands, having inside meetings, having the narrative to talk about their brand story. I think that is the driving force. Then of course, with the platforms like brand tracking and campaign pulse and cMMM, then you have an ongoing presence in the clients' decision process. They have the dashboards. They have all reports they can look into not only for looking at historical value, but also to plan for the future. So yes, we do have a very strong position in advising clients on those things. And that is also the biggest evidence to kind of mitigate churn. The more we can show up, the more we can work with our clients, the churn risk is decreasing by having that kind of...

But you didn't lose any customer in this quarter, right? I think you...

No.

No you're saying. So in your report, you recognized that you're not satisfied with your current growth and margins, but you say that you see opportunities out there. What kind of growth or margins would you be happy with?

That's a question you ask every time. We don't normally comment about the future, but we are looking, of course, at growth and a decent profitability. I think to be able to kind of make around -- predict around destiny, plan for the future. So I think that is also now very well kind of accepted in the organization. I think Nepa has always been a very consultant knowledge-driven company. But I think now the understanding of profitability and understanding about client profitability and also the company's profitability in such is very much of a stronger KPI in the organization. So no numbers, but yes, we would like to go back to organic growth and a decent profitability.

Okay. In Q3, you mentioned expecting to see results from new sales team in spring 2025. We talked about it, but are your efforts progressing in line with your expectations so far?

Yes, I think the quota per new person, per new initiative is right on target from Q4. So if we can just extrapolate that into 2025, and if we just continue to grow that team, that's going to carry good results. So yes, we are very happy with that.

So let's see here now. One question is, how is the AI pilot progressing? We talked about it last...

It's progressing very well. And as I mentioned before, that is also one of the reasons why we can be -- where we have improved our net contribution per project by, I think, 30, 25 percentage points or something like that over the course of 1.5 years. Using the AI kind of corporate tool in order to kind of drive the internal efficiencies is widely spread now, is widely used. We launched that in Q4, end of Q3. Now, it's rolled out. So everyone is using that in the organization to improve internal efficiency. And then we have 2, 3 other AI component baked into our products, AI Trend Boost, for example, which is a tool within our brand tracker to make sure that we can understand predictability in data. We have a text tool in order to figure out discrepancy in capturing data, et cetera. So yes, it's working out very well. I don't have an exact number saying that from this investment, but the ROI so far and the time and the cost of the tools are very good.

Okay. So let's move into the questions from the web. We start with the cMMM and the brand tracking. How have your current brand tracking customers reacted to the cMMM launch?

Like I said before, overall, very positive. It takes the discussion up to a new level. We move away from just talking about the brand. We're talking about the holistic view of the entire kind of marketing spend. So very, very strong. And now we are talking to more or less like all the brand tracking clients and even historical clients that we have churned way back in time, have now seen kind of cMMM. And also don't forget that the ad hoc MMM, which is also a very strong product that could be kind of the intro to cMMM.

Good. You asked me -- was actually the next question is we skip that one then. Now that the cMMM product has been released, can you share any insights on coming features or improvements you are developing or planning to develop, what time of features are the next Nepa's development pipeline or road map?

I can say that we launched the pilot last year. The pilot has now migrated into kind of a product that is launched. Features are being developed the entire time more or less, and it's still kind of shaping up in order to be part of either the full road map of the product or being things that we just evaluate. So not really saying that these are the exact features, more than it's -- we have benchmarked our cMMM product against most other products, MMM products and cMMM products in the market. And we do have -- we are on par and better with most of the features that are available in the market today. I think some people are coming into the MMM world from different aspects, one from kind of the more performance marketing digital side. We are coming in a little bit more from -- with that included, but more from kind of the brand and kind of the entire media mix, marketing mix perspective. So I think development is going fine. But like I said before, I think the whole tech strategy and product strategy, I think we're going to spend more time around that in our next report. Jakob joined us now in December. He comes from kind of the media agency world. And so he has a very good perspective on client tech and what we can do in order to kind of move closer into the clients' room when it comes to our technology solutions.

And is customers coming in with feedback back to you...

Absolutely, yes. That's an evolving discussion.

Yes. Let's see here now. How do you think about the brand tracking price currently? Are you satisfied with the current price level? Or should the price increase continue?

We are always evaluating our pricing when it comes to the kind of core kind of license per seat, per user products and prior levels and try to kind of match the market and where we see possibilities, we're going to increase. Then, of course, you have a service package setup package around that, and then per hour and those things are always kind of -- there is always room to improve them. So we do price adjustments in February, right? So that's kind of a part of the road map.

So you think once a year or...

Once a year, yes.

Yes. So on acquisitions, is it reasonable to assume that the acquisitions are more likely to happen once the Nepa returns to organic growth, meaning organic growth first and then acquisitions?

I would say yes to that. So I think for us to build a framework, which we have done and showed now that we can navigate within a very challenging market. We can -- we have built now a global organization. We have used modern technology. We have brought in people like extremely talented people like Filip and Jakob and we have a strong team now. So with that in place, seeing periods of organic growth, that will, of course, open up for that discussion that you can actually handle bolt-on acquisitions or other acquisitions. So there's always an interest to kind of track the market, and in every pitch we're up in or every forum we are in, we are, of course, kind of listening to the market, what's available out there, other technology components that we might be interested in adding to our portfolio or the companies or the geographical markets that we can look into. But we don't have anything to announce today that is imminent plan, but definitely it's on the road map.

Yes. So 2024 was a year focused on returning to profitability. Is it fair to view -- sorry. No, the next question. What type of restructuring are you doing in the U.K.? You announced it in the report today. Also, you expect the SEK 6 million incremental EBITDA improvement all else equal, full year '25 from these initiatives? I think you talked about...

We'll talk about the money. No, I think the changes in the organization in the U.K. is very much to -- again, going back to using and utilizing our global organization. So we have seen a bit of a wait and see -- bigger wait and see in the U.K. market, so -- but we are still able to serve the clients we have even better in some cases with people in other countries, with new processes, with new technology. So I think the whole idea -- and we did that already in the beginning of January of this year. So it's already up and running. We have new client teams around those clients. We have a pretty -- or a decent pipeline in the U.K. market, that is already kind of managed for to be able to take care of. When it comes to the annual impact, I think this is for kind of annual 12-month period. So I think we had a number, what was that -- some part of this is going to fall into 2026.

Okay. And in the last call, you mentioned the implemented cost-reduction measure to mitigate the negative financial impact. Have these measures been fully implemented? And can you provide any insights into the remaining financial impact? I guess it's regarding the large client there in that.

Yes. Just one comment on the U.K. So the U.K. is kind 9/12 out of that saving is going to be taken this year and the rest next year because we started this in January and then you probably have like 3, 4 months of lead times, so yes. When it comes to the preannounced churn that we did last year, we are just 1.5 months into this quarter. So there are, of course, ambitions both -- and we said that during the last -- even when we press released that, that ambition is, of course, to look on the cost side, which the U.K. is one initiative. The new organization is another initiative, technology-driven initiatives to kind of be more cost efficient, be more efficient in delivery. And then of course, we did net new logo team, with the new business ambitions for new ARR clients, for new ad hoc clients. So the ambition is, of course, to mitigate as much as possible. So the preannounced stands exactly how that will kind of -- what is the delta? I don't want to comment on that because the work is still -- the proof is still out there.

Okay. What is your capacity utilization like, could you have delivered more ad hoc projects in Q4 with the existing workforce? If there had been higher ad hoc demand among its existing ARR customers?

Yes. We have a bit of a -- we still -- and we measure that all the time with net contribution per project, with utilization levels. So there is room. And there is room. If you take kind of a specific time in the time series, yes, there is a room, but there's also room going forward because with those process improvements with AI, with new ways of working, there is definitely room. And hiring people in Mumbai, for example, is less costly. So that is also a way to kind of expand our delivery capabilities and possibilities to increase our overall kind of the hours that we can actually deliver especially in the ad hoc projects, and that has kind of been the challenge over time. If you go back to the early '20, '21, '22, even into '23, you had a pretty -- you had growth on the top line, but you always -- we were always kind of running behind when it comes to staffing and when it comes to delivering those projects in an efficient way. Now we have a much more standardized approach. So the predictability for ourselves and for the client is much higher when it comes to from quote to delivery. So that has totally changed. And that -- of course, you can only show that when you see growth on the top line. And so that is definitely the next step that we have. We have now a factory. We have now a way of working. We have extremely talented people both in the Nordics, Northern Europe as well as in India that can deliver on those things and good technology.

So looking forward a bit, do you have any updates on efforts to communicate more of Nepa's long-term vision and strategy, goals, potential Capital Markets Day or other initiatives?

I think based on this transformation that we have been through from '23, what's kind of maybe more of a -- let's reduce the cost, and that's kind of take us through that period. '24 has been, of course, look at the cost side but find ways, how can we grow this business in a scalable way? How does the pro forma P&L look like? '25 will be kind of proving that out in the market with now -- with again, talent people on board. We have a new C-level. I joined in March of last year. So I think the whole C-level, the whole organization is more or less changed. Our way of working has changed. So I think '25 will be a way to kind of pressure proof this concept. And then when that is kind of up and running, we have much easier to talk a little bit more about predictability into the future, what are our goals. Capital Markets Day is to be able to explain that. I think we have been pretty good at explaining what we do now from an overall perspective that we provide solutions to marketers around the world. I think the next step is to provide solid and understandable way of how can this going to be scalable and profitable over time.

Okay. And where is Nepa in December 2025?

In December 2025, I think we are in a position where we have kind of proved out some of the things that we are talking about today. We are definitely much more prepared to see a growth in the market. Where the market is at that point, I would -- I wish I could tell you that, because then I would be probably a much richer guy and being a leading political in the world. But definitely, we will be prepared for that. So a much more solid organization that we are growing into now, again, with extremely good people, good infrastructure, a pretty big change in our approach to tech and client tech going forward into this year 2025.

Okay. Anders and Filip, thank you very much for attending here.

Thank you very much.

Thank you.