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

Welcome to Nepa Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Anders Dahl. Please go ahead.

Good morning, and welcome to Nepa's 2025 Interim Report Presentation. My name is Anders Dahl, and I'm going to walk you through the presentation today. I'm going to start with a quick overview introduction to Nepa, and then I'm going to walk you through Q3 in a brief overview and then the underlying growth in our ARR business to describe that a little bit more in detail, but also the supporting business transformation that actually drives or have driven those numbers into a positive trend, and also a short overview or an update of our new brand tracking platform transformation that we have been kicked off during the early phases of 2025, but we will be fully launched early 2026. And then the Q3 financial results, outlook and then a Q&A for that we will wrap up the session with. Nepa is a leading marketing intelligence company, driving brand growth with -- by insightful market analysis. We track more than 7,500 brands across the globe with daily measure of thousands of advertising campaigns and annually across 50-plus markets. We deliver insights to CMOs, marketing teams and insight departments across the globe, mostly to global clients. And our way of reporting those reports is the insights is normally through PowerPoint presentations, excel spreadsheets. But in most of the cases, when it comes to ARR products in dashboards and always on tools for our clients to act on our insights -- on our actionable insights. Our three core products are brand tracking, campaign evaluation and marketing mix modeling with the addition of our continuous marketing mix modeling that we introduced end of 2024, beginning of 2025. We combine market survey data with cutting-edge technology and an excellent consultancy to deliver both recurring and ad hoc insights. So all our data is built on the survey data comes from real people that we interview or collect across the globe. We have strong presence in Northern Europe with a head office in Stockholm, presence in Helsinki, Copenhagen, London and also sales office and representation in the U.K., U.S. and a strong team in Mumbai in India. Q3 in brief, fourth consecutive quarter with bookings growth, and we see sales bookings for more than 10%, an increase of more than 10%, including ARR bookings, which increased by more than 200% in a very strong quarter when it comes to bookings. We continue to see an underlying ARR growth with an ARR growing more than close to 4%, SEK 4.7 million, excluding previous phased out contracts that we have announced earlier in previous reports and extraordinary churn. We have now realized our cost savings that we announced early on in H1 and those cost saving initiatives implemented in H1 are now fully realized. We have also positively returned to profitability with an adjusted EBITDA less CapEx of SEK 0.4 million at a margin of close to 1%, which is a very positive sign, especially in a normally fairly soft quarter that Q3 normally are with the summer vacations and all other things happened during the summer. This shows our underlying growth in our ARR business year-to-date. This is the graph. But we also see the numbers that the ARR bookings are trending in the right way, both in Q3, underlying year-to-year growth, but also the subscription revenue, excluding for the phased out contracts and the churn is an underlying growth of 3.6%. To support to this or the reason for those strong numbers is, of course, our business transformation that we kicked off late 2024, early 2025, and we are moving -- with that said, we are moving from an analyst to a trusted adviser with continuous marketing insight and intelligence to our clients with actionable insights and the focus on recurring products, and of course, that is a big help for our client and our client relationship that we are always on, but also for Nepa as a company to have a more predictable resilient revenue. With that said, starting up this quarterly report, we're going to introduce new key metrics to take a look at ARR bookings so that you can see the development in that area. We also phased out low-margin contracts like we described, starting up late 2024, early 2025, and that will help us to have a much more kind of unified service offering and also help us with an enhanced scalability when we start seeing the growth that we have seen now in the last quarters in regards to bookings. At the same time that we have done this unified service offering concentration, you can also see that we have optimized our cost base significantly. So the SEK 22 million in annual savings were realized now in Q3. So with the investment and the streamlining of the tech process, we have now built a delivery platform that we will start introducing. We have already introduced that with pilot during H1. We will add more pilots during H2, and then we will start rolling out this new tech platform in 2026. At the same time, as we have invested and modified our tech platform, we also invested in experienced hires in data scientists and a new marketing optimization team that are now fully on board, but will be fully in -- up the swing in -- towards the end of this quarter, and that will also help us to accelerate not only in the client delivery and in the insight delivery, but also to help us to accelerate our product innovation and our product development. The new brand tracking platform that we introduced or that we started to develop in late 2024 will now being launched in the beginning of 2026. But already with the H1 pilot, we have good confidence in this platform. And in H2, we will increase the number of pilots to be fully able to roll this out fully in 2026. This new platform will significantly lower our maintenance costs and unify our offers in a much better way, and it's definitely a key enabler for greater focus on product innovation, innovation that will give us enhanced UX experience, more AI tools and a much better seamless product integration into our clients' environments. So the cost efficiency, the internal cost efficiency will definitely lead to more room for client tech development and more time to develop the client tech development that will add value to our services to our clients. The financial results for the quarter, net sales declined, largely driven by the phased out contracts and extraordinary churn. We see an underlying change, excluding those contracts of minus 1%. The subscription revenue shows underlying growth of plus 4% and the recovery in ad hoc bookings but lower Q2 bookings will drive down the ad hoc revenue in Q3. OpEx decline from proactive savings we have full effect during -- of H1 cost reductions in Q3, and the personnel costs are down by 19% year-over-year and other external costs are down by 4%, excluding items affecting comparability, and in the light of those 19% year-over-year personnel reduction, we will also see that we have now managed to kind of do a transformation on knowledge side with those new hires, especially on the marketing acceleration side. The items affecting comparability relates to an external consultancy fee that we have to incur during the summer due to temporary service disruption that is now sold and cleared out. So the adjusted EBITDA for the quarter, EBITDA less CapEx is of SEK 0.4 million or an 0.8% margin, close to 1%. So a significant improvement from the negative H1 results and the cost savings are now in full effect, and we see underlying subscription revenue growth and strong bookings going into the next quarter and next year. So for the outlook, I think one very positive signal is, of course, the return to positive adjusted EBITDA less CapEx in Q3, which is a strong evidence that the strategy that we laid out in the beginning of the year is really working with cost savings, with investment in tech, with investment in a much more streamlined tech platform with a strong focus on ARR that, of course, in some quarters might have an impact on the short-term profitability, but are building a lasting value in the business and floating us into kind of a more stable and resilient business model. Fiscal year 2025 result is expected to remain negative due to losses we incurred in H1, but the company is now in a much better position for sustainable profitable growth with the underlying strategy that I explained, but also the focus on the ARR business that we will continue to drive in the quarter and, of course, into next year as well. So with that said, I'm now handing over to the Q&A side, and then we are taking questions both in the activity field, but also some pre-sent in questions that we will answer and discuss in a short while. Thanks a lot.

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

Thanks a lot. So now over to the Q&A phase. And with me, I have our Interim Vice President of Finance, Edvard Hagman, and we will take turns on answering and asking those questions that have come in before.

Good morning, everyone. Thank you, Anders, for the introduction. Let's begin with the questions we have already received. So the first one, your ARR sales increased with SEK 1 million versus last year and your total bookings increased by 10%. Does that mean that adult bookings increased compared to Q3 2024.

We have added new metrics to ARR bookings that we will continue to post in our quarterly reports. But yes, the ad hoc bookings, they do have -- they have increased as well, but we're not giving any specific number on that side, only on the ARR side since that is our focus and it is a long-term goal to kind of increase them over time.

Okay. Next question. Your ad hoc sales did recover nicely compared to Q2. Was the recovery driven by a good September or evenly distributed between the months? Was any month in Q3 better or worse than expected?

The summer months are always a bit slow, like I mentioned earlier on, that seasonality in Q3 is always hard to, depending on where people are, back from vacation, and activities during the summer. But we have a pretty good spread over the months. We are actually increasing in all 3 months. September is, of course, the strongest month, but we see good momentum from all 3 months, which is a very strong sign of where we are heading into Q4.

Okay. Thank you. Next question. Are there any salary costs related to the previous CFO recorded in Q3? And I can answer that one, but no, everything was taken in Q2. Next question. In Q4 2024, you talked about 25% to 30% higher net contribution margin per project compared to 1.5 years ago. It is correct -- or is it correct that you have continued to improve product contribution margin since Q4 2024?

During the summer of 2023 and the fall of 2023, when I joined Nepa, we had a lot of the change that we implemented, a plan to improve margins in general quite significantly. So the big bump in those margins came late '23, early '24, in '24. Of course, we continue to see improvements, and we still have goals to kind of continue to see improvements in this area, but not as big as the bump as we saw in '23, '24, but we have improvements plan and we have improvements projects going on all the time, and that is still -- that is definitely one of our key metrics internally.

Next question. Are you expecting to reduce the credit facility usage in Q4 versus current levels? I can answer that one as well. That will mainly depend on the Q4 bookings volume, our ability to invoice more upfront and working capital fluctuations and especially now when we are in the middle of a transformation going from ad hoc to more ARR focus in our sales organization. The next question is more forward-looking. Where do you think your ARR will be in a year from now? Is it fair to expect double-digit ARR growth if the current bookings trend continue?

We don't give any estimates or any forward-looking statements in that regard. As I said before, we're going to continue to point out ARR bookings quarter-over-quarter, but we're not giving any statement based on that. But as a summary to that question, and I don't know if you want to say closing remarks, but we're going to continue to stay true to the strategy we launched in late 2024, 2025. And some of the key components, as you see in those numbers are really paying off with the focus on ARR, with the focus on streamlining our contract portfolio, the mix of clients that our bigger clients right now is a different mix, a new ICP list, a tech investment or a tech change in our tech stack has really shown some good signs during 2025, and we will see the full rollout of that in 2026. And of course, a focus on building the brand Nepa, and that is both kind of internally and externally, externally with strong marketing campaigns and a lot of marketing and sales activities, internally by investing in AI tools, but also investing in the education and training for our teams, but also to be able to hire top talent and especially like I mentioned before, in our marketing optimization team. So that's going to continue, and we are just at the beginning of that.

Next question is, you wrote that over the long term, gross margins have shown a positive trend in comparable projects and revenue streams. Could you quantify this? And no, that's nothing we are quantifying at the moment, neither gross margins nor contribution margins in a specified way. Next question is, you've previously talked about increasing contribution margin by 25 to 30 percentage points. Where was it before? And where are you now? And we think we haven't disclosed any exact figures on the increase on that matter. So that's nothing we can specify at the moment. But we are much higher, like Anders said. And then another question on ARR. ARR is increasing by about SEK 3 million, which matches the contract for new customers that you signed in Q2. Should we interpret this as not signing any new customers in Q3? And no, that's not the case. The SEK 3 million signed in Q2 were now activated with contract start dates in Q3. That's why the new sales in ARR increased now in Q3, but we have signed new deals in Q3 that haven't been activated yet. Next question is, could you elaborate about how outbound sales are going now that you have a dedicated team in place?

Outbound sales is much more professionalized. It's a totally different setup with a client success organization and a new business development team or a net new logo team. So the way that we're working with sales now is totally different from before. I think the predictability is increasing. But of course, in a bit of a sluggish market as we have seen, the predictability, especially on ad hoc is hard to predict if that's going to fall in during the month or after the month or during the quarter or after the quarter. But the view and the size of the pipeline has been much clearer and much better to determine. So it's a totally different level of professionalism that we are now seeing in the sales and go-to-market team.

Next question is about the concentration in your ARR stock today. How big are the 3 clients? That's nothing we have disclosed, but we did say in the report that we are having a much more diversified ARR portfolio now than we had before the extraordinary churn and phase out contracts.

And we see that also in the pipeline that we are building and the opportunities that we see in the market. One is that we have a better mix of clients. And the other one is that with a bit of a change in our ideal client profile approach in the market, we are now also approaching clients that normally don't buy and normally have not bought market research in a new way, especially native digital companies that are seeing an increased need of especially looking into the upper funnel activities, brand building that they haven't really measured before and with their performance marketing. So I think the type of clients, size of clients and in our case, the way of uniforming or having a uniform offer to those clients is totally different now than it was a year ago.

Next question is that you have written extensively in this report and previous ones about your efforts in making the organization more scalable, freeing up resources, efficiency improvements and the expected new contribution margin from all these efforts. What do you think about your new current cost base and the potential revenues it can handle?

The new current cost base and the structure that we have built now that I mentioned before about the new brand tracking pipeline, for example, would definitely help us to scale without following or without having to continue to increase in resources. So I can't really give you any exact numbers, but we will definitely be able to scale our brand tracking deliveries significantly without adding costs. I think also the whole turnaround or I think I know that the turnaround or the change from moving from ad hoc businesses that was normally the go-to solution to increase revenue in a month previously, now to move to ARR, of course, it's a bit painful that you don't see the revenue coming in that month, but it will definitely give us a much more better client experience, but also a better and more predictable business model. So that will help us to scale the business significantly. So the cost base of running and the maintenance cost of running our new brand tracker will be significantly different going into 2026. So yes, we can scale on the existing cost base with improved margins by that, that we don't have to follow with more moving costs in that scale or in that increase.

The next question is on that same topic. The salespersons hired during last year seems to have been very successful and now you've hired more. Please share how you think about the balance of investing more in sales talent compared to profitability?

I think they go hand-in-hand because the new salespeople that we have hired are much more of the kind of the rainmaking type. They are very professional. They have done this before. They have an experienced way of working. And we -- and with the new setup in our kind of fulfillment organization or the delivery organization, we can serve those new deals in a much more efficient way. So -- and we also have pretty tough criteria if we -- the way that we are evaluating our salespeople. So I think we have good control on matching investments or recruitments with growth in order to maintain or increase profitability every time we add more resources to the sales and the new business team. You can also see from the numbers, and we have talked about that before that we also moved a lot of delivery resources and delivery capabilities to India, which is, of course, makes a good impact on the cost and the contribution margin in the projects, and we have now kind of, to some extent, changed the profile of the team in India as well to have more client-facing and analysts in the Indian organization as well. So there is an always measurement on profitability on all the hires we are doing and all the new investments we are doing in marketing, both on the sales side as well as the marketing side. All the marketing activities are being measured on an ROI basis, how well do we convert from activities we do, marketing, brand building, exhibitions, reach out webinars, customer events, et cetera. So the way we are delivering insights to our clients, we are working the same way internally to make sure that we are getting a good return on investments on all the marketing activities we do, including hiring salespeople.

Next question is, do you have any more customized customers in your ARR stock today? Or were those 3 clients the only clients that had customized solutions?

To that extent, yes, they were definitely the one with the most customized solutions. Some of the clients are still on our old platform. So when we move over to the new platform towards the end of this year, beginning of next year, there will be less customized solutions, and in the case that we need to tweak a little bit in those deliveries, it's much easier to tweak on that platform. So the cost -- and the cost will be lower and the possibility to customize contracts will be much lower. So the few that remains are going to be phased out next year. But they don't have that impact as the ones that we have already phased out at all.

Next question is, would you like to develop around MMM and what the pipeline looks like there?

We don't give that separately the MMM pipeline and the growth in that pipeline. But like I said before, the new team in marketing optimization are now developing or taking on the client relationships and then the projects we have, and we have some significant projects on that side that are looking really good. So -- but also, as I described, I think, in the previous earnings call that the MMM team and MMM product also leads and especially the continuous MMM also leads into discussions about brand tracking and campaign measurement. So even in new client cases, we might open up the door with an MMM discussion, but it might start with the brand tracking and then goes into an MMM. So the day when we feel that we are on a more kind of predictable path, we're going to start reporting an MMM separately. But today, we don't report on any product separately, the size and the development of that product only on ARR and ARR bookings.

Next question is, what is your view on the cash flow situation? You have started to realize savings, but still have a negative cash flow. When will you see the cash flow effects from the transformation? And I guess that goes back to the previous answer on the credit facility that, that depends a lot on the ad hoc and ARR bookings going forward, the ability to upfront invoice, the new deals and also the working capital fluctuations that we see, especially over quarter earnings. But in general, it is -- we do see the savings being realized now from Q3. I don't see any further questions. So I'll hand it back to you, Anders, for some closing remarks.

Yes. I would like to express some -- first of all, to the organization, the way that we have transformed or working with the transformation process internally now is a very strong evidence to the team efforts, and it's great to see that all the hard work that the teams and the different parts of our organization has done during the first phase of this year, but also during 2024, and it is now paying off in numbers, and I'd like to thank you all for coming in with a lot of good questions, good discussions, and thank you for taking the time and listening into our presentation of the Q3 financials from Nepa. Thanks a lot, and have a great day, and see you soon.