Spir Group ASA (SPIR.OL) Earnings Call Transcript & Summary

Good morning. My name is Nicolay Moulin and I am the CEO of Sikri Group. Today, I'm happy to present our Fourth Quarter together with our CFO, Camilla Aardal. [Operator Instructions] We have a familiar agenda and in a few seconds, I will give you a bit more flavor on our strategy and how we create value. Then Camilla will give you all the details on the quarterly development. Q4 was a solid quarter for Sikri Group, with continued revenue growth, particularly driven by strong development in the public segment. EBITDA margin was stable at a solid 18%. The Sikri Group is a technology company that is based on knowledge of unique data, modern software platform and a deep domain expertise. We create value by creating seamless digital services not only for the public sector, private businesses and citizens in isolation, we also help the 3 different categories of users interact efficiently between each other. We'll get back to examples on how we create value for customers and which growth leverage we have after a quick flash on the Q4 performance. Although, the real estate market has been challenging in 2022, which affected revenue streams in private and in Metria, the Sikri Group delivered solid financial results in Q4. Our skills and focus on delivering software-as-a-service are materializing in a steady increase in annual recurring revenue, which has increased with 8% to NOK 373 million, 75% of the group's revenue is recurring or recurring like. The annual growth in especially driven by public customers signed contracts for mission-critical systems. We won 61% of the public sector tenders we participated in, in Norway. These are great customers, stable and predictable. They have a high degree of satisfaction, demonstrated by only 0.8% annual churn. Our revenue for the quarter grew by 2% compared with the fourth quarter in 2021. Organically, revenue grew by 4% when adjusting for currency impact. All segment deliveries grew for the quarter, which we are very pleased with, especially because the real estate market has been challenging for a large part of the year. Our profitability is stable with an EBITDA margin on 18%. Our business model is scalable and increasingly based on a software-as-a-service model and let me give some more insight into our growth drivers. First, following several acquisitions, the recent years, we see great opportunities for cross-selling and synergies. We already take exciting products from Norway, adapting them, offering them to customers in the public sector in Sweden. The potential to sell products across geographic and across customer groups is extensive. Secondly, we have a solid development capacity with around 200 in-house development resources across the group, who holds deep expertise on various customers' domain and their process. We constantly develop new products based on our existing database and technology platform. This goes both ways for public sector, for players in the real estate market and not the least for private consumers. We finally -- we work a lot with strengthening our sales culture to realize the potential in attracting new customers and retaining the ones we have. In addition, we will use the M&A as an attractive vehicle for driving continued growth and development, finding companies that will give us access to new markets or proving software-as-a-service solutions that we could introduce to our existing customer base. The Nordic market is a perfect place to be for a company like the Sikri Group. The market is highly attractive for a few reasons. Firstly, digitalization is a very high up on the agenda, both for the public sector and for a private enterprise. Secondly, private consumers have a very high expectation with regards to swift and [ easy returns ] process when dealing with public and private entities. And they adopt digital processes swiftly. There's a even increasing demand for documentation and regulation, which increased the need for digital solutions. We have a great market position in some extremely attractive parts of the market. First, as you can see on the left-hand side of this picture, the public sector, we are a perfect supplier of solution for among other things, case management, risk and compliance tools and data and analysis within geo and real estate. As an example, a very large part of Norwegian municipalities use our case management and archiving solutions. Secondly, we have a strong position both in Norway and Sweden with regards to mission-critical geo and real estate data and analysis, market insights within real estate and digitalization of processes in the same sector. As an example, you will get in touch with our systems when you buy or sell a home. A large part of the information package provided by the real estate agent is delivered through our solutions. And if there's final documents, transferring ownership of the property you are signed digitally, there is a good chance that's the solution is provided by us with automatic integration, with all relevant registries, public entities and financial institution. Finally, we have a rapidly growing consumer-oriented suite of solutions, focusing on primarily on homeowners, documentation and property information. A great example is Boligmappa, the #1 solution for collecting and storing essential information about properties in Norway. As a foundation for all of the -- all of this lies our system for efficient exchange of data and transactions between public and private entities. I mentioned that the Nordic market is a great place to be. But if we zoom in further, the public sector of the Nordic is a fantastic client base to have. Digitalization is a very high up on the list of priorities, both for the Norwegian and the Swedish government. So investment here are set to continue with full force. And an efficient public sector with fast and correct decision-making processes does not only provide a benefit for public sector, but also a great benefit and predictability for the private sector, which overall creates a society with increased competitiveness. On the group level, 45% of our revenue stems from the public sector, which represents a predictable revenue base. And on that note, most of the group's solutions are need to have and not nice to have. The Sikri Group has an active approach to M&A and a proven track record. Our latest step was the divestment of Prognosesenteret in Q4. This was financially attractive, but not the least strategically important as we true -- this took further step to being a pure software house, rapidly moving more services towards pure software-as-a-service models. In our history back to 2019, acquisition and consolidation have been a great driver for value creation. The acquisition in 2020 were smaller, adding very important product and technology with great synergies. The acquisition of Ambita in 2021 and Metria in 2022 were transformational as they gave us a leading position both in Norway and Sweden. We will continue to be active in M&A and a consolidator of the market, seeking bolt-on acquisitions in order to complete our portfolio with products, technology and customer segments where there is synergy potential. There are many opportunities out there. But as always, we will be patient and prioritize capital discipline. Let me now talk about the strong market position in Norway and Sweden. The Sikri Group delivers value-adding services to public sector, private businesses and consumers. All of our 4 segments enjoys very strong and market-leading positions. The public segment deliver public administration software in a highly regulated market. In Norway, there are 3 main players in this market. There is an increased demand for more efficient digital services, both for the public and private sector. Within the public segment, we have a high level of recurring revenue through long-term software-as-a-service agreements with municipalities and governmental agencies. Subscription revenue are growing, supported by a consulting business that partners with customers to implement and integrate our solution into the document handling processes. The service within our private segments are indispensable for a range of players in the real estate life cycle. Let me mention real estate agents, banks, insurance company as a key example. 90% of all real estate transactions are touched by our services. We help our customers with necessary information and services for performing property transactions. The Norwegian property transaction market is one of the world's most efficient property market and we strongly believe this is adaptable to the other Nordic market. Metria is a leading force in the Swedish market when it comes to property and geo data, with many similarities to our offerings in Norway. Their customers span from a large bank to municipalities and governmental institution. Within the private and Metria segment, we focus on using data to create digital services. We have a deep knowledge within a broad spectrum of data sources that are needed within real estate, banking and insurance driving a high share of reoccurring revenue in that segment, where the numbers of services bought by each -- bought by each customer is increasing. Infoland is our most well-known offering within this space in Norway, which carrying a high share of COGS, explained a lower profit margin compared with the public segment. Finally, in the consumer segment, we are delivering as doing our service [ booklets ] for a car, for your home under the brand Boligmappa. Our aim is to facilitate the availability of all relevant information about property in one place. This is also a regulated space where the requirements for having proper documentation drives the need for our solution, which we provide to the platform, Boligmappa. The consumer segment is still in an investment phase, but growth is strong and the potential is vast. As you see, everything is connected. So by delivering services with the mentality of sharing and making data flow with open APIs across all our solutions. We are an attractive supplier and partner. Let's move deeper into the quarter itself. We continued to execute on our strategy in the fourth quarter, strengthening both our operation and the financial position through the sales of Prognosesenteret and the successful private placement of NOK 100 million. Looking at the segment, Public continue very strongly with 17% revenue growth and improved EBITDA margin. We continue to win tenders and moving customers into a cloud environment. Private grew 2%, even though the real estate market is volatile. Important to note is that we maintain market share and continue to drive the product innovation forward, the same type of dynamics were visible in Metria. The consumer segment is mainly focusing on driving traffic and engagement, as well as product development. Nevertheless, it's good to see a 30% revenue growth and a positive EBITDA. Let's look at some of the highlights from each of our 4 segments during the quarter. Starting with the public segment, new contract was signed with both Asker and Fredrikstad municipality, Norway's 8 and 10th biggest municipality measured in population. Fredrikstad is one of my favorite stories for this quarter, as they have implemented our market-leading solution for digital building application. This resulted in a reduction of pending cases from 216 to 10 in only a few months. This adds to Sikri's market-leading position among Norwegian municipalities and close to all new deliveries are cloud-based. In private sector, revenue is correlated to the real estate market and hence impacted by seasonality and market fluctuation. We are very happy to see that a building application solution, Byggesoknaden, increased revenue by 20% and an increase in the number of paying customers of 11 compared to last year. The user-friendly and flexible version of Infoland Meglerpakke saw a continued improvement and testing of the new integration systems toward real estate agents. New customers successfully rolled on to the new solution in Q4 and a rollout of greater scope will be continued in 2023. The Consumer segment increased a new sale -- increased new sales by 130% in Q4 2022 compared to the same period last year. During the quarter, Boligmappa signed a new deal with El-Proffen, as well as new license deals with electronic chain, Konstel. The Consumer segment is currently focusing on continuing the user growth initiatives among private users, with a 204% increase in the monthly active users in Q4 2022 compared to the same quarter last year. The Boligmappa.no service was augmented with several new features during 2022, focusing on property conditions and radon measurements. During the fourth quarter of 2022, Metria signed 2 framework agreements with Swedish Environmental Protection Agency, both with an agreement period of 4 years with a 3-year option to extend. Metria has collaborated with the Swedish Protection Agency for several years already and the new agreement underlie the solution foundation between the 2 entities. The estimated value of the contract over the 7-year period are SEK 430 million. Sikri Group has been in a intensive period with regards to integration of Metria with the rest of the group during 2022 and the integration process is developing according to plan. Several synergies between Metria and the rest of the group have been identified and Metria and other Sikri Group subsidiaries have joined forces in public tenders during Q4 2022. Let's now move over to the operational and financial review. And for that, let me hand the floor over to our CFO, Camilla Aardal. And remember to continue posting questions to us use the Q&A function in the webcast player.

Thank you, Nicolay. Q4 was a solid quarter for the Sikri Group. We are a software house, rapidly moving towards the cloud and into software-as-a-service models. We're happy to see that our ambitions are materializing in an increase in annual recurring revenue of 8% year-over-year. This is based on our ability to utilize unique data, create modern technology platforms and leverage our deep domain expertise. Our annual recurring revenue, which is measured in pure subscription-based software-as-a-service revenue is now at NOK 373 million. In pro forma terms, revenue grew by 2% in Q4 2022 compared with the same quarter last year. However, the reported growth was negatively impacted by the currency effects as the underlying growth was actually 4% and we're very satisfied to see that all of our 4 segments delivered organic growth in Q4. The public segment saw a strong development in recurring revenues in line with the modernization of delivering software to the public sector. The private and Metria segments are closely related to the development in the real estate market, which has been turbulent during 2022, but we're happy to see that they still delivered growth in the quarter. In terms of profitability, the revenue growth has a strong positive impact in the public segment. The adjusted EBITDA margin for the Sikri Group for the quarter was 18%, equal to the same quarter in 2021. As our segments have different drivers, we will detail this picture a bit more to provide some further clarity around the revenue development for the quarter. Our financial figures both actuals and pro forma have been updated to reflect the divestment of Prognosesenteret, which Nicolay mentioned. Pro forma revenues for Q4 2021 were NOK 266 million. Currency fluctuations led to a difference of NOK 4.4 million between the reported figures in Q4 2021 and 2022. Adjusting for this impact, operational revenue growth was 4% in Q4 2022. As seen here, public revenues grew by 17% in Q4, mainly driven by a steady growth in annual recurring revenues throughout the year. Private revenues grew by 2% in Q4 due to the introduction of new services to our existing customers. The consumer segment is performing well on all KPIs and revenues grew by 30% in Q4, driven by a growth of [ 204% ] of monthly active users, as Nicolay mentioned. Finally, Metria also experienced a 1% growth measured in local currency, driven by a higher volume of projects and consultancy work, offsetting some of the negative impacts from the decline in transactional real estate revenues in Sweden. As our financials indicate, we're making good progress. The growth in software-as-a-service revenue in the Public segment translates to higher profitability with an adjusted EBITDA margin of 28% for the quarter. For Private, the growth in Q4 came mainly from the sale of property data, which is a low margin area and thus the revenue mix translates into a slight reduction in profitability. The Consumer segment has received tailwinds by the new property transaction law introduced in 2022 of Avhendingsloven. We continue to invest in a solution and the Boligmappa.no service was augmented with several new features, focusing on property condition and radon measurements. Our newest segment, Metria shows great promise, but we have not yet realized the full potential. Currently, we utilize a higher volume of subcontractors, especially in the planning and surveying segment due to a tight recruitment market, which impacts EBITDA. We're looking forward to maximizing the potential synergy effects going forward. Let's dive more into detail in the 4 key segments of the Sikri Group. Starting with the Public segment, our strategy has always been clear and we are pleased that the transformation to cloud solutions continues to materialize into higher annual recurring revenues. Annual recurring revenue is at NOK 176 million at the end of the fourth quarter and revenue for the quarter grew 17% from Q4 2021. This is driven by a high win rate, which was 61% this year and our ability to implement new agreements. We're also pleased that the Public segment delivered EBITDA margin of 28% for the quarter, mainly due to the underlying increase in revenues. The Private segment saw growth of 2% in the quarter. The real estate market was challenging in 2022, while we saw a slight upswing during the fourth quarter. Developing new services and increasing our product footprints towards our customers is an important strategic priority for the Private segment. As a result, we're happy to see that 9 out of 10 customers have increased their use of our services during the past 12-month period. The EBITDA margin development is mainly result of product mix as other costs have remained quite stable, although there have been some increases in travel sales and marketing costs in 2022, which were very low during COVID in 2020 and somewhat in 2021. We value our clients highly and being active in the sales space is very important to develop and defend our positions. Going forward, we will continue to invest in other services that we expect to improve the overall profitability. The Consumer segment is showing growth through a strong increase in new subscriptions. Annual recurring revenue has grown by 15% from Q4 2021. The revenue growth was primarily driven by several new customer deals and successful growth initiatives. The new regulation of Avhendingsloven introduced in January 2022 has provided a good tailwind for the service. We're also especially pleased to see the increase in monthly active users in Q4. EBITDA margins in Consumer segment are conservative due to high-level investments in developing the platform. The Metria segment also experienced growth in Q4, measured in local currency. Revenues were negatively affected by the slow real estate market in Sweden, which impacts Metria's sale of information related to real estate transactions in a slightly different way than for the private segment in Norway. Metria's sale of real estate information is based on properties sold or renegotiated loans. In addition to real estate information and geo data, Metria has an increased number of projects and consultancy work on customized IT solutions during Q4, driving growth in the quarter and software-as-a-service revenues continued to develop positively. Annual recurring revenue for Metria is now at NOK 118 million. Metria signed 2 framework agreements with the Swedish Environmental Protection Agency in Q4, which Nicolay mentioned, providing a solid platform of data to the agency. The Sikri Group is an intensive period with regards to the integration of Metria with the rest of the group and it is our ambition to improve Metria's financial results going forward and we believe that we will be able to translate synergies and opportunities into above 20% EBITDA margins overtime. Moving on from our 4 segments, we also want to highlight our income statement presented as actuals. The Sikri Group saw revenues increase in Q4 by 72% compared with last year, driven by the acquisition of Metria earlier this year. Personnel expenses increased accordingly as the Sikri Group has around 490 employees as of quarter end, 250 of them joining from the Metria acquisition. We capitalized development costs for the quarter of NOK 17 million and depreciation and amortization expenses have increased due to the increased amortization of intangible assets from acquired businesses. The increase in financial expenses is mainly explained by the increase in borrowings due to acquisitions and some minor increases in interest expense on lease liabilities. As a portion of debt has now been reduced, financial expenses are expected to be lower going forward and I'll come back to that. Profit from discontinued operations is the profit from the divested Prognosesenteret. As illustrated, our cash flow is impacted by seasonal fluctuations. In line with this, we generated NOK 44 million in operating cash flow in Q4, translating into NOK 22 million of free cash flow when deducting CapEx and lease payments. Working capital is significantly more negative in the first quarter of the year, as the public segment invoices a large part of its customers on a yearly basis in January. Thus, a strong cash inflow is expected in Q1 of this year. The Sikri Group's cash balance was at NOK 69 million at the end of the third quarter in 2022, where of NOK 31 million consisted of cash asset held for sale, which is an adjustment for the sale of Prognosesenteret. During the fourth quarter, we used proceeds from the sale of Prognosesenteret, as well as from new equity raised to repay borrowings. The bridge facility drawn as part of the Metria acquisition is fully repaid and we have repaid funds on our term loans as well. As a result, our leverage position is strongly improved at year-end. Assets consist to a large degree of intangible assets, where of NOK 712 million is goodwill and the remainder is capitalized development, customer contracts and trademarks. Intangible assets have increased during 2022, mainly due to the acquisition of Metria. Equity is slightly above NOK 1 billion, leading to an equity ratio of 47%. During the quarter, net borrowings were reduced by NOK 180 million and net interest-bearing debt is NOK 755.8 million at quarter end, including lease liabilities of NOK 48.3 million. Post Q4, we have been informed that due to change of control of ownership in Prognosesenteret, the seller's credit owed to the Sikri Group of NOK 37.5 million will be repaid to us in Q1, 1.5 year earlier than originally agreed with the buyers. Nicolay, would you like to summarize the quarter and make some remarks about what we can expect going forward?

Thank you very much, Camilla. So to a quick summary. In Q4, we continued to deliver steady growth and a solid profit margin. Public growth, particularly well, driven by new contracts and continuous conversions to the cloud. Structurally, we have taken additional step to being a pure software house through the divestment of Prognosesenteret. Our financial position is considerably strengthened following our equity raise and sale of Prognosesenteret. Looking ahead, first of all, we enjoy market-leading position in attractive niches. Our revenue are diversified and at the same time, resilient as the product and customer mix is favorable. A very large part of our revenue is recurring, which provides stability as well. We do expect some volatility in the real estate transaction market. We are set for a very exciting and positive period for the following key focal points, reinforcing the sales organization across the group, improving margins and realizing scale effect and synergies. And finally, the most important thing we do is investing in more software-as-a-service solution, creating seamless digital services to enable powerful insight and easy interaction between people, the private and the public sector. For the Sikri Group, this will translate into higher annual recurring revenue and improving margin in the short and long-term. And that is -- and that's it and the end of our presentation. We will now pause for just a few second before we are back and ready to answer your questions. Thank you.

Welcome back and yep, let's answer some of the incoming questions that we have received. Camilla, can you take us through the different questions?

Yes. So we have a question here, whether we are looking at more M&A activity going into 2023 and what that might look like.

Yes. Thank you. Yes, we are still working quite systematically at M&A and we look at especially now maybe bolt-on acquisitions. As we have been talking about before, we are talking about digital chains and we see a lot of opportunities to finding companies that could make us enter new markets or we can take our existing technology and do cross-selling. So, yes, we are still working quite hard on different M&A activities also in 2023.

Yes. Also, if we could talk a little about the competitive situation within the Public sector. How is that looking?

Looking at the Public sector, it's definitely high competitions and it's a continuous struggle to keep up the numbers. And as we showed on during the presentation today, we still have a very good win rate on public bids, around 61%. And we also do have a very low churn only on 0.8% looking at Q4. So we do feel that our ambitions to deliver quality and win on quality is something that we are always working in line with and we see that, that strategy is working and is giving those -- at least from my point of view, since we see that this is highly competitive that we are doing quite well with a 60% win rate on all these public tenders.

And this is very interesting because that's actually the Norwegian market.

Yes, yes.

And how do you think that we will be able to translate that into the Public sector in Sweden, which we now have such good access to?

Yes, no, I think that when we started the Sikri organization, we were very focused on creating a sales culture because you can create the best software you can imagine, but if you're not able to actually sell those kind of solutions to the market, you will not succeed. So I do believe that the sales culture that we see in both in the Sikri segment, also the private to public segment, but also in the private segment, we see a strong sales culture. And I hope that this is adaptable also in other markets that we are working in.

Very good. Let's see. How about looking a little bit in the future, what is the potential that we see over time regarding margins? We received that question a lot because we now have acquisitions.

Yes, no, I think that as the numbers, of course, shows, we have done a lot of acquisitions. And of course, that has a cost. But I do believe quite believe that we already stated in Q3 that is definitely an ambition to go beyond 20% when looking at the EBITDA margin for the whole group. And I think that elements that we do now will lead us into those results, hopefully, in the coming months and years.

All right. We have a question here, which, of course, is very interesting when it comes to the Private segment and on EBITDA, the fact that private had a quite conservative growth in Q4 despite a 5% growth in properties put up for sale real estate listings. September and January, the months that are spanning Q4 were also strong. So the question is, as this is one of our drivers, there can always be some lag, but there should not be a lag. What explains the soft revenue increase and whether we're losing market share? And actually, the answer to that is quite simple because in the fourth quarter in 2021, we had higher sales of higher-margin products. And actually, the Infoland solution has done quite well in Q4 and that will also reflect on the margins. So if you look at the margin year-over-the-year, the margin -- the EBITDA margin has actually gone down because Infoland has such a high COGS, so that shows that. While the other products are more around, for example, real estate development, which we know has really slowed down and those are smaller products, so the impact isn't so big, but that's the explanation. So yes, Infoland has done very well in Q4.

And we're not losing...

And we're not losing market share as far as we can see. Naturally, we also have a question around cash flow. Cash flow seems weak in Q4 and cash conversion has in general been weak in 2022. Can you comment on net working capital development in Q4? And what we can expect for 2023 in terms of net working capital impact on cash flow? I understand that this is interesting. That is true. During 2022, we have had some big acquisition -- one big acquisition. We had listing on the stock exchange. We've done a divestment. Those have carried some extraordinary costs that we would not have in a normal setting. And if you look at our operational cash flow, the really big difference to EBITDA is actually just our CapEx and which is we are investing in developing the solutions for the future. Also the comment on net working capital is very fair. We have a strong seasonality as shown in the presentation and that also means that we expect a very positive cash situation in the company in the first quarter and half of the year. Also as well, we received the news on the seller's credit with [indiscernible] under sale that we will receive now in Q1. So...

Instead of Q4 2024. So all those things will work positive on the capital.

Yep. That looks like it's about for now.

Yes. Thank you very much for your time and have a good day.

Thank you.