Omda AS (OMDA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the presentation of the first quarter report for CSAM in 2023. The report and a copy of the presentation is available on news web and on our home page. This presentation comprises a 30-minute presentation and is followed by a live Q&A session. You can type in your questions at any time and we will attend to them later in this webcast. A recording of this webcast will be available on our homepage shortly after it ends. And soon to follow also a transcript. But now I have the pleasure of handing over to you, Sverre. Let's get the show on the road.

Thank you, Einar, and welcome, everyone. It's a pleasure for me to go through the highlights of the first quarter. It represents a good trend and the progress according to our business plan. Before we go into the highlights, let's just repeat some of the important parts of our strategy, especially the markets we are in, emergency response and health care. And what we have focused on is the niche software and we will continue to do that. It's been part of our long-term success with recurring revenue. And also, we have become a strong leader in these areas in the Nordics over the years. And as you have seen from our previous development and also this quarter, we are growing further across Europe and beyond outside the Nordics as well. And obviously, why are people working here, why do we get up in the morning. Obviously, most of our systems are focused on helping the society, the health care workers and in the end, the patient. So if you look at this couple here, obviously, if they've had a tragedy in the family, if they had some good news about a birth, a baby received or they're thinking about having a baby or they have just had a emergency call. All of these situations, you will see that CSAM components are a part of the processes. And I think these functional support in the health care and emergency response is obviously important and will be -- continue to be our main strategy going forward. And then we have business-wise been able to create a very diversified business, not only through the Nordics, but now in 27 countries. And diversification is important also when it comes to stability and long-term recurring revenue streams. So for our business, we now see that the growth of recurring revenue is the main thing and the main KPI for our managers and teams. And now all of our business areas, we have 8 business areas, but 7 of them are related to health care software. #8 is through this year, becoming a separate consulting company, but it's part of the business as of today. These 7 areas have had since the last year, obviously, a process with regards to becoming decentralized business areas. This has been an important step. And as you see there, different size of the chart, obviously, as you see public safety, which is the biggest one and you have medication management, the smallest one. On the other hand, they are run the same way. The same principle applies when it comes to organic growth, EBITDA measurement and also integration of new acquisition targets. So in the end, we have chosen to focus on these 7 areas, both when it comes to organic growth and also further M&As. In the future, we also look to increase the number of niches and through acquisitions. But so far, we will go through this today, obviously, the -- for the first time, also the performance within these business areas. And just to focus on the principle when we go into each is obviously also to create a small value chain inside each of these areas. And especially, if you look at the 2 first one in the top left, you can see they are completely different when it comes to what type of health care business they are targeting. One is the medication management, which is related to cancer. And the other one, women and children's health focus on babies and obviously, a pregnancy of babies. And then you can see that these are different in that sense, but completely the same when it comes to a concept. And our concept focusing on the value chain is to target different user groups and add functional components over years to secure a broader value chain and then again, securing the stickiness of these important systems. So I think without going into all these details of the businesses, I think it's important to understand also when you read our quarters that this type of approach is a long-term strategy that has created the current growing recurring revenue stream. So let's go into some of the highlights for this quarter. Obviously, we are very happy to tell you that the growth of the recurring revenue is very, very strong. And from NOK 67 million last quarter of the quarter -- first quarter of '22 to NOK 79 million this year. And obviously, if you take NOK 79 million times 4, you will see how this trends for 2023. And I think the other thing that is important is obviously these customer types that support is recurring revenue, obviously. These systems are in place many times for decades. And that is obviously why the recurring revenue has a low churn also. So the combination of fast-growing recurring revenue, low churn and these important customer structures is what makes this a very good quarter, showing that our value creation over time is on track. So that is important. Also, we have to celebrate this quarter to get to a 3-digit number, more than NOK 100 million a quarter total sales is also very good. And we think also with a growth of 7% income is where we're in the phase we have guided. And we are very happy to see that 4 times 100 is also a nice I think, approach to what we have said will be roughly our sales for 2023 as well. So I think we're trending right and this is important for further value creation. The same thing with organic growth, which is a different number than the growth of the sale and income in total, this is in local, of course, per business area. So -- and 6% is also good in the interval we have been communicating earlier between 5 and 10. And so we're happy to see that it moves forward as expected. And also, income quality is part of our process now obviously to secure better EBITDA over time. And then we think 92% gross margin is quite good. And we have obviously actions going on to make this even better, but it's good already. So that's good news. And also, we have broken the trend from last year as planned. So we are progressing in the plan when it comes to reduction of cost, which then again has given us a 5% EBITDA so far. And this is without having the effect of our Triginta project, which was carried through in the first quarter, but the effect obviously very small in this quarter. But the good thing, we are still then progressing in the right way. And that means that we internally see that the plan is progressing as we expected, which is also good. And then it's important for us, although we are very strong in the Nordics and we have much more potential in the Nordics, our international growth is important. And we see now that this increase outside is coming from organic growth, which is important when we look at the ability to grow further and also when it comes to new acquisitions in the future, we see that there are a huge potential for us to follow our plan to become a notable player in Europe and in the world. So we're happy to see that. And 14% outside is good. We expect that to grow further in the years to come. And then I have to repeat and summarize a bit about buy, integrate and build, which is -- has been a very important part of our business, our strategy. Buy, integrate and build, obviously, is what we do each time we have an acquisition. And acquisitions need to be integrated to get to the margin, EBITDA margin we want. And our target margin, 30% is a structured approach we use to get to that margin. And these -- this is a playbook. And as you all know, we have reorganized through '22 getting a more decentralized model, but the buy, integrate and build is the same. So each manager is responsible for carrying through managing projects to secure the margin expansion. And then previously, we have reported these acquisitions or integration projects and we see they have different states, meaning that they will, at some point in time, dilute margin very much. And at the same time, you have a 2-year project per target to secure a combined margin in the end. And this is obviously what we have been doing and following and previously as a central portfolio, but now more in business area-oriented structure. So I would like to explain then the combination of our history here of acquisitions and the specific plan starting now in the first quarter when we finalized the Triginta project. So if you start on the left here to understand what we did in 2018, starting with the acquisition from [ Sabin Sweden ] and then some other acquisitions where we diluted the margin and we had an integration process and we then restore the margin and we started again in late 2020 to acquire more acquisitions and then ending in Carmona in the beginning of '22. And then obviously, now is the same process here to secure the margin again. And to explain specifically the plan. The first quarter this year, which we now presented, we have completed the project, Triginta, which we explained in the fourth quarter last year. And please understand that this milestone is important when it comes to the performance of the second and the third quarter and not that important for our first quarter. However, it is critical when it comes to number of employees. If you look at our annual report and see the numbers of employees there versus end first quarter, you will see how the trend is going on the cost side, which is not shown in the numbers of the first quarter. So this milestone, the first quarter, we have actually then finalized Triginta. However, the effect of Triginta, meaning the run rates on the salary side, obviously, will come in the second quarter. And that's why in our plan, if you look at the second quarter, most of the effect there will come on the employee side. But then again, as I mentioned, what is happening in the second quarter? Well, we have a lot of important deliveries, meaning we have a high run rate still on the consultant side. And that is what we have to do. And through the second quarter, we will then reduce number of consultants. That means in addition to other cost savings as well on the plan that our plan to reach our target margin is structured this way that the combination of reducing employees in the first quarter with the effect in the second quarter, reducing consultants in the second quarter with the effect from the third quarter is how we are then planning to reach our target. And this is not -- or this is specifically designed or described as buy, integrate and build in our documentation when we IPO-ed in 2020. So this is nothing new, but I think it's important to communicate that this quarter shows that we are on our way to reach this and how we're going to reach it. So to read us going way forward, I think this is important. And then how are we going to do this specifically internally? As mentioned, we have this decentralized model. We have specific persons doing exactly what they're supposed to do within each area and we will measure them, obviously, on the major KPIs that we have for the company in total, like the organic growth, the EBITDA and obviously, capital discipline. And what we do now is obviously to see that these areas we have started for the first time to show you also the KPIs for these areas for the first time, which I think is also relevant. It's not easy to read. There are different types of business, different types of delivery structures. So a quarter is not necessarily the best way to measure them. On the other hand, to show the progress each quarter will be interesting over time. So let's look at this. We have now shown that the 7 business areas delivering software to emergency response and health care, have different sales, different sizes. We have a completely different EBITDA and different CapEx and different organic growth, although altogether, they are showing the numbers that we have presented this quarter and also the previous quarters. And why are they so different? Why shouldn't it be very easy to read? Well, I think that is important if we just take 3 of them and look at what's going on. It will always -- when we present a quarter, it would always be lumpy. And the reason is that many of our delivery projects are over many months and sometimes many years, meaning that the business case is good, but the business case of one quarter might not be good. And this is ordinary business for CSAM. So when it looks like this, it is not a negative factor. For instance, if you look at LIMS here, well, it's a negative EBITDA, but we have explained before what has been going on here. We have explained the technology shift. We are working on a new version. We have a pipeline of customers there, where we have doubled the delivery teams, meaning higher use of consultants temporarily. And obviously, also, as we have announced, we have this contract, a national contract in Denmark which also is challenging for a company on the short term, front-loaded with cost. On the other hand, the business is good. So looking at this quarter, it is like this. The same with the organic growth, high line [ systems ] in the quarter we compared to and the lower in the quarter we present. So things like that will always be lumpy. And for instance, if you look at medication management, you look at an organic growth of minus 19%. Why is that? Well, the simplicity here is that in the first quarter '22, we obviously had delivery with licenses, professional services and increased recurring revenue. But obviously, if you don't have that in this quarter, it will look negative. If you look at medication management over time, we acquired this in 2008, that is 15 years, and the average of 15 years will still be close to 10% organic growth. So that's why it's important for us to communicate when we publish this each quarter, expect lumpiness. And then if you look at Connected Healthcare has a quite heavy consulting on a temporary basis. So that is primarily why the EBITDA is low. And as you know, as you saw from the other time line, we are still some integrations going on and health analytics will still go on for a while, which will be at least the rest of the year and also in the beginning of '24. So then you have seen it and we will go through more details when it comes to the business and numbers later. So in summary, this quarter, with a 18% increase in recurring revenues, it's a strong quarter and we also see the diversification and the growth outside the Nordics. And with the strong low churn current platform in the Nordics and increasing outside also with more organic sales outside Europe, including North America, I think we see now that our plan is working and that the first quarter is a quite good progress towards our plans. And now let's go into the financials and the numbers and Einar, it's your turn to run the show.

Thank you, Sverre. All right. Let's go have a look at the financial and all the juicy numbers. First and foremost, the most important part of season's revenue stream, the recurring revenue, a healthy growth from the quarter last quarter. And also here, you see the last 4 quarters, 11% growth from the last 4 quarters, approaching the NOK 300 million number. And if you look at the run rate, it's actually higher. So this is a good news for the bond-holders and for the shareholders. Right. The revenue mix, we're very satisfied with the quality of earnings for the quarter. You see a very high recurring revenue, the most important and then average license sales, good professional services holding up. And if you look at the recurring revenue, we see that it's actually an increase of 18% on reported income. And that is a recurring revenue now comprises -- sorry, consists of 77% of total income is represented by the recurring revenue. So we're very good revenue mix indeed. The cost base, if you look at the cost base for -- and compared to first quarter last year, but also to the fourth quarter of last year, we see that we are heading in the right direction in -- during the fourth quarter presentation, we said that you should expect to see the first raise of light in the first quarter presentation. I think that is what you're seeing. I think we are maintaining the top line. We said we were heading into a year with NOK 400 million in sales and we're actually a little bit above that. And on the cost side, the effect of the Triginta project, you see that COGS is under control. We have a gross margin at 92%. So we're heading in the right direction compared to the fourth quarter. When we look at the number of employees and you see there in the blue ovals at the bottom there on the bar charts and these -- those numbers you can also find in our quarterly reports and in the annual report. And keep in mind that those numbers, they are the numbers exiting the fourth quarter. So we went into the first quarter of 2023 with 317 employees. And we are exiting the first quarter and entering into the second quarter with 297 employees. But most of those 317 employees, you can't use the average. Most of the 317 employees were still there during the first quarter and they are -- they affect the P&L accordingly. The temporary use of consultants, we said that you shouldn't expect them to show anything in the first quarter and they will still be there and they will gradually be phased out during the second quarter -- this quarter with the full effect visible in the third quarter this year. And also keep in mind that although we have finalized project for Triginta, per se, there have been some people leaving us with severance packages also in the second quarter. And that effect, of course, will be visible at the end of this quarter, but it will affect next quarter. One example or 2 examples could be the previous business area managers for medical imaging and Connected Healthcare replaced by an in-house recruitment. That could be one example of that one. You see on other costs, you see they are progressing very close to our target. So they have come down significantly from the fourth quarter of last year. So all in all, costs, we are on our way. The EBITDA margin, of course, down from the first quarter last year to the first quarter this year, but that is explained by the previous slide. But still as Sverre demonstrated for you, we are better than the fourth quarter last year, so things are improving. CapEx, we maintain our guidance of 10% GAAP CapEx, although it was around 8% in the first quarter. And you see that the EBITDA, of course, still hampered by the reorganization. So it will take another quarter before it has full effect. But again, the cost reduction program is indeed on track. And we will see -- and we should -- you should expect to see more visible effects in the second quarter when we present those numbers later in August. Okay. Net working capital, we maintain focus on cash management and net working -- and capital discipline. And we're happy to announce and to see that it actually improved 5 percentage points compared to the same quarter last year, not -- still not as good as the first quarter in 2021, but definitely, it is an improvement and we will continue to maintain focus on net working capital. Okay. Who are our investors? We see that on the free float, not so much change, but we do note that U.S. investors, they have increased their holdings somewhat compared to the last time when we met. Okay. Time to wrap it up. First, we will continue in the short run to focus on organic growth and to maintain the top line. So that will definitely be the main focus. We will continue to focus on profitability. We -- our ambition is to deliver a 30% EBITDA margin in the third quarter. So we will definitely remain cost-focused and focus on quality earnings. And then a lot of people have asked us what about M&A? Have you completely forgotten about M&A and someone said, you shouldn't focus on it at all. The answer is, we are focusing on it and we maintain focus. There is high activity in this area, but we will remain focused and as the Oracle of Omaha said, success is very much about staying disciplined and to say no. But again, to grow organically as fast as we can, we're probably growing as fast as it is possible right now organically. And then if we want to grow faster, and that is our ambition, you need to do M&A and to do acquisitions. So that is a part of what we do to also grow through M&A. So we maintain focus, but at the same time, we want to buy the right companies, the right businesses at -- on the right conditions. We are absolutely convinced that the decentralized model has been the right thing to do. And we have -- it has empowered the organization most definitely. And we are -- we have seen some positive results from that already. And I think we'll continue to see more positive results from that going forward. And last but not least, let me repeat this -- we initiated the cost reduction program and announced that just before Christmas last year. We executed on this during the first quarter and we'll gradually see the effects. So to paraphrase the -- one of the greatest hockey players in the world, Wayne Gretzky, skate to where the puck is going to be, not where it has been. All right. We will maintain our ambition, as I said, to be a leading player going forward and our ambitions to reach the NOK 1 billion remain. We shall see if we -- when we reach it. But rest assured, our ambitions remain unchanged. And then before we go into M&A, subscribe to our newsletter, if you're interested in all the juicy news. You can use your mobile phone and scan this QR code and -- or you can log into our website. Okay. That was it, and I think it's time to move on to the Q&A -- M&A slip of the tongue there. Right. Okay. Let me take a look.

And one of the first questions here goes to me and that is related to organic growth. And that is how much of your 6% organic growth is driven by repricing existing customers and how much is new business? And that is -- that is the 6% organic growth, this is really the first part of that, that is -- let me remind you how we calculate organic growth. It is -- it comprises license sales, recurring revenue and professional services and it's measured in local currency. And so the 6% also -- that is how is measured. Keep in mind that license sales, they were unusually high in the first quarter in 2022. So that kind of camouflages the underlying organic growth. And then when it comes to the question about existing customers versus new business, I will leave that to you, Sverre.

Yes, I think that's a good question. It's -- we haven't reported exactly. But normally, on average, it will always be mostly sales to current customers. So I would tell you, up to 90% of our growth is related to the fact that we have more than 750 contracts and customers that want more. And that is also why we have a stable 5% to 10% growth over time. On the other hand, we have seen new, as I mentioned, also in outside Nordics, some organic growth increasing within our emergency area. So there are a little bit of both and it might change a bit over time. But so far, I will stick to say that around 90% still is sales to current customers.

Okay. So let me get rid of that one. And the next question and there are several questions here related to the breakdown in business areas and the results, EBITDA, et cetera. Let's see if we can address them and maybe some overlap here, but you'll have me excused. One is, can you help us understand how some of the cost base of [indiscernible] Carmona, MedSciNet and Carmenta to such a steep decline in profits from 2020 to 2022, seems like the increased cost base is higher than these combined. Okay. And I'll actually address this question by reading the next question because they are indeed very much linked together. And I think you very much -- the answer is linked to the next question, namely, is the business area EBITDA, does it include corporate overhead? Or does that come in addition? And the answer is it includes corporate overheads. So all -- everything we call common services is included and distributed down to the various business areas. And also keep in mind that the -- what we show you is the results for the first quarter where we really haven't seen the effect of project Triginta for the cost reduction program. So there are 2 ways of doing this. Maybe we should have been clear in the report, but either we could show you the marginal contribution from each business area to the EBITDA or we could distribute and allocate it out. We have chosen the latter. So for each business area, they have their costs allocated. So the margin contribution is much better. And that also, I think, answers the first question. And again, we -- the reason why we reorganized and trimmed down the organization that we were simply too many the way in the previous centralized organization, that is why we had the project Triginta in the first place. Okay. So I hope that answers that. And then there's a question, I think, for you, Sverre, and that is related to the sales force. How does the close down of the sales force in Q1 impact your future ability to grow organically? I didn't know we had closed out the sales force. So -- but maybe you can share some light on this.

Yes, it's a very interesting question. Obviously, it's the opposite way. The reorganization has created much higher and forceful sales force, obviously. The focus and the closer to the customer model makes it much easier to secure and follow up with customers. And since most of our sales, as I mentioned, close to 90% is to current customers, the model where the business area managers focusing on sales and with their also key persons in their team, focusing more and more on customer centricity, I think the sales force now is much, much stronger than it ever has been in CSAM. So I'm very happy to explain that.

Okay. It's -- that's great. Some questions related to FX or foreign exchange. The first one is related to the impact of FX on the price increase on organic revenue growth in Q1. Okay. Again, as I said, the way we measure organic growth, it's license sales, recurring revenues and professional services. And actually, because the license sales were lower in the first quarter of 2023, but again, if you look at the total license sales for 2022 and divide it by 4, you see an average of around NOK 3 million per quarter, which is around where we are in the first quarter of 2023. So that's more normal, if you like. So it really camouflages the underlying growth. But FX, so you should really study that on the recurring revenue. We have previously guided and said and I think we'll repeat that we get some price escalators in the contract, I would say, around 5%, but there are huge differences from contract to contract. But that wouldn't be 5% out of the 6%, that would be -- so related to those 5% to the growth of recurring revenue. All right. I'll follow up with another question related to foreign exchange. How has the high inflation impacted your results? Very much the same, both on revenue and cost. I think I just explained the revenue side. On the cost side, of course, I mean, there are price escalators in most contracts when we -- that we have on, say, housing and our suppliers and so it impacts that. But that, again, I think cost discipline and a reduction of the number of employees or FTEs is much more important. And the contracts are the CPI-adjusted, I assume the one asking the question refers to our sales contracts, customer contracts. And the answer is, yes, by and large, they are -- there may be a few exceptions, but most of them are. But again, we have many hundred contracts with many hundred customers. And keep in mind, we have acquired those contracts through acquisitions. So they are not all the like, so there are different price escalators in all the different contracts and there are differences from country to country and from business area to business area. We have previously communicated that it's between like 1% and 11%, so assume an average of around 5%. And does these escalators balance out increased salaries? Again, approximately, I'd say, yes. Okay. And now it's one for you, Sverre, and that relates to external consultants. Usually, it's hard to get rid of consultants. So how confident are you that the margins will go to 30% shedding Europe consultants? Can we get rid of them?