Nordhealth AS (NORDH) Earnings Call Transcript & Summary

Hi, everyone. Welcome to the Q1 2024 presentation. And as usual we want -- I want to introduce myself, Charles MacBain, CEO of Nordhealth; and also my colleague, Mari Orttenvuori, who is our CFO. We'll start with a company update. Then we'll go through an update on each of the different business units, and then Mari will go through financial updates, and we'll end with a Q&A. For Q&A, please wait for questions at the end of the presentation, [Operator Instructions] So starting with the company update. So the first thing is, at the beginning of every year, given that we display numbers in constant currency, we reset the numbers, the constant currency that we use is at year-end of the previous year. So basically, we had to reset our ARR numbers from being based on FX of end of year 2022 to FX end of year 2023. So as you can see, so with the previous exchange rates, we ended the year at 36.6 in terms of Q4 2023 implemented ARR. There's a big FX impact, which is mostly due to the weakening NOK relative to the euro. And in addition, as we are improving our ARR reporting capabilities, we have decided to shift to report ARR based on the last month of the quarter versus the whole quarter. So that will be a more precise measurements going forward. It doesn't have a huge impact, but it's also normalized for that. As you can see, that means that Q4 2023 implemented ARR was at 35.6 (sic) 36.6. And if we look at Q1, implemented ARR in 2023, which we have to just to be able to show the year-over-year growth rates. It went 32 to 31.7, and the 0.8 of that impact was due to the NOK to euro changes, but there was a positive impact from the new ARR reporting. So starting with our Q1 2024 KPIs. Over the last 12 months, we've grown 15.1% in organic ARR. Our net retention was 108%. Our gross churn was 6.6%, and our CAC to new ARR was 1.3 overall, which you can summarize into an LTV to CAC ratio of around 8.5. Then as a result, we ended the year of the quarter with EUR' 36.5 million of implemented ARR, and we reached this important milestone of signed ARR being around EUR 40 million. Given the number of outstanding shares, this means that our ARR per share is around EUR 0.46. Though it was good to set the context. So when I joined the company in Q4 of 2018, right? And at that time, we had EUR 3.3 million of ARR. And we've grown over this period -- this last few years at a CAGR of 60%, some of which comes from M&A and acquisitions, as you can see in the light blue, but most of it actually comes from organic ARR. It's good to note here that the EUR 40 million in Q1 2024 does not include the Vets4Pets post rollouts, and also some of the CVS ARR that has not been committed. Now quarter-over-quarter, we grew 2.6% in implemented ARR. This was driven by new customer growth of around 600,000 and upsell 1.1. that upsell is driven by price increases that we usually do for our products in Q1. And all of our products actually had price increases with the exception of EasyPractice, which will have a price increase in effected in Q3. Then we also had a churn of 0.8, which is quite high relative to other quarters, and we'll go down to explain why that happened. Now looking year-over-year, we ended Q1 2023 with 31.7. then we added 2.3 million of ARR of new customers, right? We had a net upsell of 4.6. And we had churn of 2.1 million, which is the 6.6 churn that we mentioned before. Then what you can see in the last part, the 3.5 million, which is the signed ARR, which has not yet implemented has increased from EUR 2 million to 3.5. And this is a big deal that we have been successful with the CVS pilots, and they're committed to rolling out all their small animal clinics over to Provet Cloud. This is a big, big news for us in the U.K. and a testament that we -- of our localization and our scalability. We'll go that a bit deeper to that in the veterinary part of the presentation. And we're also improved in profitability, where in Q1 2023, our EBITDA minus CapEx adjusted. And you can see the adjustments are for restructuring costs mostly in Q1 2023 and 2024, and you can see the math is there. But we've almost half the loss in 1 year, right? So EBITDA minus CapEx margin have improved from minus 23% to minus 9%. We have had a small increase in veterinary head count to support growth, particularly some of the product side and also some of the implementation side to be able to support the accelerated CVS rollout. Now on to veterinary. So the big news that I alluded to in the earlier slide was CVS pilot has been successful, right? So we had an initial 15 clinic pilot with CVS, where it has set out all of our features. We had some capital optionality that we worked all together to partner with them to be able to create improvements. And following this [indiscernible] pilots, we have actually been working with them on an accelerated rollout. And this is actually quite unique in that we've been able to place -- to implement over 50 practices per week, for CVS, which is a peak that has not -- never been achieved by us personally or as we -- as far as we know by any other company in the veterinary VMS space. This is a real testament to not only the product architecture scaling, it's because doing data migrations for over 50 clinics it's a huge amount of data is very, very promising on the product, but also on the operational innovations that we've had on implementation. So I'm super proud of the team and what they've been able to do with the CVS implementation. And as a [indiscernible], around 140 clinics are now live on Provet Cloud. And in addition to that, we haven't -- we've also been keeping busy with recruiting nonenterprise clients. So we signed over EUR 400,000 in additional new ARR in Q1. Next is on the migration side. So as you know, our strategy is to be able to migrate customers from our legacy platforms that we've acquired to Provet Cloud, a flagship platform. And we're happy to announce that we've actually end-of-life [ Provet ], which was a finish most of the pharma software. And second, we are going to end-of-life as well Vetserve in Q2 of this year. These are two big products that will be discontinued. And these have captured the majority of the churn in Q1 2024 as a result of few remaining customers that just stay on until the last day until the end-of-life. As of the end of Q1 2024, 64% of our implemented ARR was generated in Provet Cloud. And we still have a few product migrations that are pending, Sanimalis in Norway, Vetera in the DACH region, and Novasoft in Denmark. So in terms of implemented ARR performance year-over-year, we have been able to grow 21.3% year-over-year. The net retention rate was around 114.4%, right, you can see by that 2.9 million increase in ARR. And churn, despite the fact that we had quite high churn in Q1 2024 as a result of this end-of-life of the two software that I mentioned, that's y Provet Cloud was still only 4%. And as you can see, the impact of the CVS signed agreement means that we still have to implement about 2 million of additional -- sorry, [ 4.5 ] million of additional signed but not implemented ARR. Quarter-over-quarter, we grew 4.7%. new customers were around 0.2% as a [indiscernible] implemented. Net upsell was 1.1 million and churn was 0.4, which is harder than we normally have in the order these migrations. We also improved the adjusted EBITDA minus CapEx, right, from negative 1.6 to negative 0.4, which is a EUR 1.2 million improvement in profitability. The drivers of improved profitability were, one, primarily growth, right? So as we grow, right? The operational leverage that we have enables us to be able to have a great impact on the bottom line, so have to account 1.9 of this difference. And we also have been able to improve our customer acquisition costs due to realization improvements of the implementation functions, both on the operations side but also on the revenue side. And other costs have remained the same. And this is a really, really key point is that as we scale, right, more and more, right, we do not have to add significant new headcounts in many of the areas, at least not proportion of the growth, right? Now dive in a little bit deeper into churn and net retention, as we mentioned before, right, the churn has been higher in Q1 2024 year-over-year due to these migrations. But we do have to -- although this graph looks a bit scary to increase, you do have to keep in context that it is still 4%, right? And 4% actually means that someone stays with us on an average, 25 years, right? So still, despite these high churn events, we still have a huge, huge low customer lifetime value. And what CVS is that the net retention rate on average over the last 5 years have been around 117%. However, it was 114% in Q1 2024. And that's actually slightly by design is that we believe that we need to focus on capturing more and more new users and focusing on expand our user base and putting our development resources on those [indiscernible] versus focusing on net new add-on products. Once they use our onboarded, then we have the opportunity to offer them more integrated, better add-on products. But the primary focus is still increasing these accounts. And one of the key things is that the rapid rollout of Provet Cloud CVS will also the impact of that retention rate, as it's a current customer now. On therapy side, so we had a price increase on the therapy for all products except EasyPractice. EasyPractice prices increase will be in Q3 2024. The user growth counts actually has declined by 75 users in Q1, right? This is quite normal in Q1, and that's we previously had buying yearly plans for [indiscernible]. And so January and July was normally the main time where people actually reduced -- are able to reduce their user accounts. The second driver that is that a lot of our Finnish customers also take a look at how many users are actually not using the system and they do a little [ clean ] or really in Q1. Interestingly, we're still doing sales and we're still doing quite well on sales of our legacy Physica and Psykbase products, where the Oslo municipality signed a 4-year deal of around 60 users. On the migration front. So our -- the way we are initially targeting this is that we're targeting the most simple use case, which is basically single users, private therapists, we've done an initial pilot with 28 clinics that were migrated as of December 31, 2023. The main feedback was that we had to do a bit more on the accounting reports. And so we created that work that was launched in -- actually this week. And we are looking to resume the pilots to get that feedback on the accounting report. Once that feedback is positive, you might have to do a bit more tweaks, but once it's positive, we will continue the migration of all single-user private therapists, initially and then look to target development on the next most complex user segment, which is the users which are using the [ region half ]. On the people side, as we mentioned on our previous calls, we've been shifting from a product-based organization to a functional organization as we centralize our resources around EasyPractice or flagship products. And that was completed. And so we've got -- it will be a big change in the leadership team on that one with new responsibilities. On the recruitment side, as we continue to grow both business units and with the experience that we provide in veterinary, [ Volta ] we've been doing a great job. We are looking as well to hire a new General Manager to replace myself as the CEO of the business unit and to take full ownership of that to allow me to refocus my time on acquisitions. And thirdly, we are also looking for a new head of marketing that will happen after the General Manager because there's 2 different types of profile that we're looking for. One is someone from the engineering product side, which would need a much stronger head of marketing, and the second is someone from the marketing side, which would require less strong head of marketing. So depending on the choice of GM, we will make a subsequent hire in marketing that goes along with that quite well. So year-over-year, we grew 9% and from 14.2 million to 15.4 million right? Net retention was quite low and including prices increases around 101%. That's quite low historically. And churn was also quite high. This high churn was driven primarily by one big change, which was that in 2023, our second largest customer, which we mentioned in a previous presentation in Finland for Diarium, actually churned. So we are -- the nice thing about the year-over-year numbers is that we're still doing quite well on new customer recruitment, and recruiting new customers is relatively impressive to new veterinary [indiscernible] actually quite cheap. And so with this product-led model that we have, we believe that we can actually be quite successful once we got product market fit in some markets to be able to scale quite cheaply organically. Quarter-over-quarter, implemented ARR [ 0.7% ]. And as you can see, although the new customer growth was quite good in Q1. And net upsell was positively impacted by price increases but negatively impacted by the downsell that's driven by user accounts going down, right? As we mentioned, the churn rate was high, but the loss is the one enterprise customer, which also impacted previous quarters. That means although growth has been a bit less than we expected on the therapy business units. The profitability has continued to improve as a result of the fact that we are growing recurring revenues. and that growth is due to operational leverage, results in bottom-line improvements and that other costs are relatively stable. Dive in deep a little bit more into churn and net retention, right? We can see in 2023 and Q1 2024, last 12 months, the higher churn, and that's mostly due to this impact of [indiscernible]. On the net retention side, net retention historically has been 110. And similar to veterinary, we are prioritizing the new user acquisitions or migration in this case, over new add-ons. There's a big exception to this, which is basically the booking portal. which only is developing for us, which will be a great upsell of duty in the next years to come. Now, Mari, I'll hand it over to you for financial updates.

Thank you, Charles. So let's take a look at the first quarter financials then. Total revenues in the first quarter grew by 17% year-over-year. That was mainly driven by veterinary cloud products, as already discussed. If calculated on a constant currency basis, [ cropping ] total reported revenues would have been slightly higher at 18%. But with almost half of our revenue is being earned in Norway or in Sweden, the weak currencies continue to have a big impact on our reported revenues. As we convert to [indiscernible] I do apologize some background noise from here. Share of recurring revenues in the first quarter was 91%, an increase from 86% in the previous quarter, that was being impacted by high level of [ pad ] development revenues. Adjusted EBITDA improved from negative EUR 0.6 million to positive EUR 0.3 million, and adjusted EBITDA margin improved from negative 6% to a positive 3%. Then on to the recurring revenue. Next slide, please. So reported recurring revenues have grown by 14% from EUR 7.9 million to EUR 9 million. And on a constant currency basis, the growth would have been 16%. In the previous quarter, adjusted EBITDA margin was negative 7%, but we are back on positive 3%, and we expect a positive trend to continue. Headcount has increased from 378 to 392 in the last 12 months as we've seen some -- we've seen recruitment activity picking up slightly again during the second half of last year and that is now continuing, for example, in Provet Cloud implementation and support teams in order to ensure all of our ongoing implementations and migrations to Provet Cloud, also under the new scalable implementation model as well as providing quality support to all of our customers. But profitability has improved quarter-over-quarter with the exception -- now of the final quarter plus this year that was impacted by additional spending on marketing and security audits, but we are committed to improving our profitability and with a positive trend to conclude here. We've improved our free cash flow by EUR 3 million from the previous year. And for the first time since the IPO, our free cash flow was positive. So we are really thrilled about that. Although we are still likely to see some fluctuation in our cash flows between quarters. We are steadily improving towards long-term positive free cash flow as we are on the path of becoming EBITDA minus CapEx positive in the first quarter of next year. And with that, we will be in a great place to further finance our investments in product development or in any potential M&A. It was mentioned in our previous quarter's presentation that majority of our Aspit customers in Norway have now changed from biannual monthly -- from biannual to monthly invoicing cycle and that took place as of the beginning of this year. So that means that previously, our Aspit customers we invoiced in June and in December and majority of the customer payments were received already in December, of December invoicing. And the first, invoicing under the new billing schedule was now made in January this year and the estimated impact on our net working capital for the first quarter was approximately EUR 1.6 million. Also, we have received some delayed customer payments of about EUR 1 million during the first quarter. So that is impacting the quarter's free cash flow positively as well. So our cash balance remains strong. Cash equivalents and investments in total, increasing from EUR 22.2 million to EUR 22.8 million during the quarter. And of this, EUR 16.2 million of the total is invested in money market funds as at the end of the quarter and the rest is in cash or cash equivalent. We have EUR 46.3 million of goodwill on our balance sheet, and there has been no acquisitions, no impairments of goodwill recognized during the quarter. And of the EUR 12.8 million intangible assets, almost entirely, that consists of capitalized development expenses. And we have recorded some additions of about EUR 1.2 million in the first quarter. We haven't had any material equity transactions during the first quarter and equity remains strong at EUR 78.8 million. And we continue still not to have any external financing. We don't have any material earn-out liabilities remaining on our balance sheet. So the liabilities consist of operative liabilities. So no change there from the previous quarter. And the more detailed first quarter financials, you can find in the appendices as before. And we will issue the second quarter results on 20th of August and also the half year financial report will be issued on that date. Charles?

Thank you, Mari. Just to conclude, on the veterinary side, we're really excited about the CVS pilots have been successful, and the rollout also as the ongoing run being successful, right? It's a really big milestone for our expansion in the U.K., right? And proves the implementation architecture scalability of our solution. Excluding CVS, we also continue to sign other clients. And third is, we took -- we've taken a more aggressive approach in Nordic migration to Provet Cloud that has led to some churn but will dramatically simplify operations for us. On the therapy side, we had a slower than anticipated migration due to the pilot pause, but pilots will be resuming in June. The -- what's really exciting for us on the therapy side is that once we are localized for those specialties or sub specialties, right? It's a fully automated migration. So all of our pilots were fully automatically migrates. There was no onboarding or trading needed by other people. And very limited support post migration and the support that it's for this upgraded users of pilots have actually been lower than they are quite significantly lower than they have been on [indiscernible] solutions or rebut that the impact that we'll have once we have more and more of our customer base on to EasyPractice. We also have had 30 clinics onboarded to our booking portal nordhealth.fi in Finland during the Q1 pilot phase. And the first sale has been made. So that's an exciting new development, and we look forward to scaling that booking portal in Finland. On the guidance side, no change in the guidance, we are still reiterating despite the CVS rolled out acceleration of 15% to 20% recurring revenue growth with constant currency. And on EBITDA minus CapEx breakeven by Q1 2025. Great. And now off to questions. So as I mentioned at the beginning of the presentation, please feel free to add questions on the chat or feel free to raise your hand, and I can, right, to say the question.

We initially have a few questions from Oliver. So I'll repeat the question first, and then either I answer it or Mari answer it. So the first question from Oliver was did you experience any negative Easter effects on sales or net working capital? Mari?

Nothing material. So -- our revenues are accrued over the period of the month. So always, if our customer contracts are made mid-month, we start accruing revenues midmonth. Of course, sales activity over holiday periods is impacted to somewhat but nothing material on that side.

There was a second question on there is a slowdown in organic new customer sales growth year-over-year on a group level. Could you elaborate on the drivers behind this? So if we look at sales, right, the way I like to look at it is looking at signed ARR, not just implemented ARR, right? And so there has actually not been a slowdown if we look at the change in signed ARR plus the change in implemented ARR, right, this actually accelerated along the year, year-over-year. And the last 12 months have been our best months that we've ever had. But yes, there has been a slowdown if you look at implemented ARR, and that has two reasons. One is that resources are going from implementing, the other clinics implementing CVS. So the pilot has been even though they were clean Q1 has taken a lot of resources to make sure that you can actually go live. And the second is that the CVS rollout is also a net retention. So that's probably a big explanation or as well. Oliver, does that answer your question? Okay. Let me have investments, and we can clarify. Any other questions? Okay, there's no other. Yes, there's another question, right?. Can you comment on the development in the U.S. what is the development strategy going forward? Can you comment on market dynamics and competition? That's a great question. So in the U.S., we have -- we only operate with Provet Cloud, which is our veterinary practice management software. But we've got over 100 clinics in the U.S. using Provet Cloud daily. Our development strategy, there's a big overlap in development between what is needed in the U.K. and what's needed in U.S. There are net new developments needed as well for the U.S. specifically on the integration side, but also on the -- there's some boarding functionality that does not exist as prevalently in the U.K. So there are some additional benefits needed. We are localized given that's over 100 clinics with CVS, but we lack some of the integrations for now as we've been focusing on development resources on making sure that we're successful in the U.K. with CVS, and [indiscernible], right, we have had less development capacity to focus on the U.S. That being said, we're continually selling in the U.S. The other really interesting dynamic about the U.S. is that is on the payment side. The attachment rate of payments is quite high. And for smaller clinics, the profit we can make from payments can be just as much as the profit that we can make in subscription revenues. And as a result, right, the we can afford to spend a bit more on customer acquisition costs, given that additional revenue that we get per customer. And if we talk about the market dynamics, the U.S. is, by far, the most competitive markets in the world, right, in terms of -- they've got a great products, independent products, both on the start-up side -- mostly on the start-up side, such as Shepherd, Vetspire, these have good solutions. They're not yet very mature to target the enterprise segments. So that is a segment that we are going after in the U.S. and that's designing a software that's fit for purpose brand by is dramatically different than designing the software, just fit for purpose for one clinic, in terms of the scalability required, the way you design the architecture and also the way you go about implementing. Implementation can be very, very complex and often fail as we've seen in the U.S., many of our competitors have failed in implementation. So that's the sort of niche market segment that we're going after enterprise mostly small animal. We always continuously monitor the customer acquisition costs and the return on investment on that and it still makes financial sense, right? Even though it's more competitive, it's hard to find clients, right? So we will continue to develop in the U.S. and our next big goal there is to actually have a big corporate joins, right? That's been how we've been successful in all of these markets is that these corporates have -- are very needy and that neediness drives us to up our bars in terms of the product development and I love that, right? So fussy customers leads us to better product, right? So I love that. And so -- the important thing to know is that the bar is high in the U.S., not just in terms of the integration, but also in terms of the basic processes. And those basic processes are shared globally. So the better we are in the U.S. the more gap we have before European competitors as well. So it keeps up our toes. And I like that. I hope that answers your question. Any other questions? Perfect, There's no other questions. Thank you very much, everyone, for your time for -- and we'll see you next quarter. Thank you.

Thank you.