Talenom Oyj (TNOM) Earnings Call Transcript & Summary

Hi there. You are welcome to follow up Talenom Q3 report release. This is Otto-Pekka Huhtala who is speaking. And here is my colleague, Matti Eilonen, as Chief Financial Officer.

Hello, everybody.

Today, our content is that we have short review of latest periods. And after that, I will shortly tell about strategy progress and Matti will open more about financial figures. And after presentation, we have short outlook and guidance and you have possible for any questions. Okay. Talenom's growth fell short of the target, but continue as strong. Profitability improvement measures progress. Our net sales increased 20%, a little bit lower. EBITDA margin decreased 2%. But in Q3, it increased 5%. And as you can see, this recover is ongoing regarding this profitable. Comparable operating profit was 22% less than a year ago, but Matti will open more about figures. Here are some words regarding accounting industry and market in Europe. The total market is roughly EUR 100 million, and Finnish market is just only 1% of that. Basis for this big picture, this is the reason why we have methods in the go forward to go new market that it could give possibilities to grow faster. And we are so big in Finland that our growth rate will mature all of that in Finland. Okay. The digitalization is accelerated by many structural changes. So labor shortage, together with increasing regulation, forces us to seek more effective practices. It's very difficult to hire new people in like Spain and in Italian market, so it's needed to have some better practices to make like bookkeeping. And digitalization will help people to work within this industry. Okay. The other driver is this EU Directive e-Invoice. Directive, it will be as a mandatory way of sending and receiving invoices in the near future in all European countries like Spain today. It will be there during next 2 years that all companies should have some solutions for that. So we see that all small and medium-sized companies, they have to have solutions like software to send and receive e-Invoices. This will give a very good momentum for us because we have a platform, which can resolve those problems. So it will like demand our organic growth. Shortly, our 1 pager, how do we see. Our vision is unbeatable accounting and banking services for small and medium enterprises. This is what we try to achieve, like it's the vision. And our competitive advantage basis for that, that we offer for our clients easy way for daily basis, financial routines. And the second one is that we automate our internal routines as much as it's possible, and it gives more space. It gives more time to care our clients. And so it will also rise our customer satisfaction because we have more time than our competitors, and this base it for our high level of automation. Okay. We have a proven strategy and a strong track record. We have done transformation from the traditional accounting office to current way to do the things like digital way, and we created our own platform between 2000 and 2015. And we end up like its total in 2016 to '20. And as you see, our net sales has increased all the time, but EBIT margin tripled and -- from Phase 1 to Phase 2. And now we are duplicating this proven concept on international markets. And so we are now in Sweden, like in Phase -- 2015, we are just enabling our software there, and we are adapting it by office by office. And we believe that it will really help also our business from our clients' perspective. We are offering cheap and easy-to-use tools for them. The other stakeholder, our experts can have also better solution, more automated solution to do the bookkeeping. And it will give time -- us to help our clients, and it will increase our customer satisfaction. And also their stakeholder investors, they will get also higher profitable as we see here. Our internationalization progressing as planned. 21-hour international net sales was like 13% of total. And today, it's like close to 30%. And you see that Talenom has growth, but we have even faster growth in foreign countries like Sweden, Spain and now also in the Italian market. Some words regarding our strategic progress. We have accelerated our digital sales. We renewed our brand, and now we have 1 brand in all our 4 countries. And we have same products in all countries. So this will like help us to improve -- is to -- by onboarding processes. And today, we see that first results that we are getting more clients via digital way. But we are just in beginning in this phase, but now we have the basement things are in place, and we are now improving -- like continuously improving our digital sales. We believe that the future more of -- all of the more and more, our organic growth will come from digital way. Second issue is distribution of banking services. So we started delivering Talenom accounts in Finland market and -- during last summer. And we see that there is a clear demand for comprehensive solutions, including bank account software and accounting services especially in the small enterprise segment for which the Talenom 1 product has been developed. And the third thing is the software implementation in Sweden. Implementation is ongoing by office by office. And as I noted earlier, why do we do that? So we are now adopting it at all -- our major features are in places. There isn't any more blocker. So we have also started to sell this also for new clients. We are our own sales force. And what we have seen for transferred customers to customer-specific savings in working time have been significant. And this gives more and more evidence for us that we are in the right track ongoing. Okay. This was shortly my phase, and now it's time for Matti. Thank you.

Hello, everybody. Welcome to follow this presentation from my behalf also. Let's start with the revenue. The revenue growth was 21% during the whole year and 20% on the last quarter. About 1/3 came from the organic growth, and it was driven by active sales and value-add services. And 2/3 came from the acquisitions, especially in Sweden and in Spain. But our target was a little bit higher, and we didn't achieve our internal targets on revenue. Overall, the economic development, it has the negative reflection on the growth. Anyway, it was nice growth, but we were expecting a little bit more. And due to the fact that we were expecting a little bit more growth, we were recruiting people against that stronger growth. And during the spring, we had to launch profitability improvements for the whole group. And now we can see a little bit impact on that. Usually, the second half in our industry is a little bit weaker on profitability side, but that's natural thing. But the significant thing is that we were able to improve our EBITDA from a year behind. So the EBITDA grew 5% from 7.3% to 7.6%. We believe that this kind of profitability development will continue in the future when we are setting up this profitability improvements, especially in Finland. I would like to remind you that the business is very profitable relative to the industry at the moment. Then let's move on to the country-specific figures. Finland has a quite steady and strong position. And our growth was 9%, 8% on the last quarter. And this growth was mainly -- or was purely organic, and it came through the active sales and value-added services sales. But in Finland as in Sweden as well, we are heading towards recession. We are probably in the recession. And overall, the economic slowdown has weakened our growth. Generally, the slowdown of the economy resulted so that the volume-based invoicing per customer and the revenue per customer. In some cases, it's a little bit lower than it was before. So that's how it works, this recession that it slows down our growth in Finland. Also, we made significant price adjustments in Finland, but that has -- it doesn't have that much impact because of this slowdown effects, what we can see in economy. Here is Finland profitability development. As you can see, it's quite steady and also strong. This year, it suffered a little bit from this phenomenon of economic slowdown, as you can see. But in the spring, we started this profitability improvements, especially in Finland, and you can see it on the last quarter that EBITDA went up from EUR 7 million to EUR 7.8 million, and also the relative profitability has increased a little bit. We are expecting this phenomenon to develop more in the future as the time goes by, and this more profitability improvements will take place. So Finland is in really good position, and we can make really good profitability here in Finland. Then let's move to Sweden figures. Very strong growth in Sweden, 44% in whole year, 28% the last quarter. And this growth came mainly from the acquisitions nowadays. Sweden has suffered the same kind of phenomenon as Finland has. We are -- the country structure is pretty much the same and it's same kind of effect also, the slowdown of the economic situation. And this is why it has slowed down the -- our revenue growth also in Sweden. And also the Swedish krona is quite low at the moment compared to euro, and that also has the negative impact on the Euro denominated net sales development. Then the profitability in Sweden. As you can see that the EBITDA margin is significantly lower and also the euros are lower. The economic slowdown also had the same kind of effect on the profitability in Sweden. In Sweden, we didn't want to press the brakes on recruitments and replacing the -- leaving people so much because we really want to ensure that the implementation of our own software that we can get it up and running, and this currently requires personnel so that we can get this own software working in Sweden. So we chose this path rather than the short-term profitability development because we believe that when we have our own software, so we can build up this profitability development later or more strong. And as you can see from the chart on the right-hand side, the economic slowdown has steepened it on the last quarter, and that also has a negative impact. Then other countries, these figures are mainly from Spain. Italy is really small part of this. In Spain, we ended up EUR 5.5 million revenue and really strong growth for 467% growing this year. And this came mainly from the acquisitions. So we have really strong growth in Spain. And through the acquisitions and those acquisitions we have made lately, those are really profitable, but the profitability is depressed -- down because the relative shares of the supporting functions is quite high as you saw that it was EUR 5.5 million. And when you are building up the supporting functions, of course, that takes money and brings cost, and the relative share of that is really significant at the moment. Also that we bought this business -- platform business in autumn 2022. It's pressing down our figures also. But that was sort of a must-have investment because we want to ensure that we have capabilities to take advantage of growth when the EU e-Invoice Directive is becoming mandatory in Spain as well. Here's a little bit development on -- of our profitability in Spain. As you can see, at the end of last year, Q4 of 2022, the profitability was negative, about EUR 400,000 and it same continued on the first quarter of this year, and then it has improved quite a bit. Now when we have put more volume on the business, it's starting to get close to 0. And our plan is to make more acquisitions and turn this to a positive profitability in near future. And as you can see, the development has been quite good lately. And about the outlook and guidance. So we started this year preparing ourselves for stronger growth. Unfortunately, the economic situation slowed down our growth, and we had all these costs and recruitments in it and that we needed to start profitability improvements on the spring. Unfortunately, we are running out of time, sort of a thing. And it wasn't possible to keep the original guidance anymore. So we lowered our guidance for this year. The net sales is expected to be between EUR 120 million, EUR 125 million. And EBITDA is between EUR 30 million, EUR 34 million. And the comparable operating profit, excluding the software-related write-downs, is around EUR 10 million and EUR 13 million. And the write-downs of those softwares, which we are no longer use or plan not to use in the future, was EUR 3.2 million. So it means that the operating profit with those write-downs included is going to be EUR 7 million and EUR 10 million. So on the profitability side, this year is going to be a little bit weaker than the year before, but we are very positive about the opportunities created by the digitalization of the European accounting market, especially in the central part and southern parts of Europe. Through this digitalization, we have great opportunities to grow and create also profitable growth. Thank you very much, and now it's time for questions.

Ladies and gentlemen, I'd like to remind you that you can post questions to the chat or you can use audio by raising the hand in the video screen. Okay. We have a first question from Emil Immonen at Carnegie. How large has the decline in billing volumes being for your customers in Finland and Sweden?

First of all, it includes the purchase invoices and the sales invoices and the payslips. And the part of this volume from our revenue is around 30%. And the accounting itself, it's fixed pricing, but it's based on the volumes as well. So if the clients' volumes dropped significantly, then we need to adjust this fixed price as well. So it works both ways, first, more quickly to the volumes, but later on also to the fixed price.

And Emil continues, what is the revenue per customer currently? And what is the normal level?

The average in Finland, for example, is 5,000 annually revenue. But the variation between the clients, it's really high. Some of them are lower than 1,000 annual revenue and some of them are really, really big. So the variation is really, really big. And the same kind of thing is in other countries as well. The average in Sweden at the moment is a little bit lower. And in Spain, and it's even more lower.

And still from Emil, I don't know if you answered this already in your previous answer, but how much of your sales is tied to your customers' revenues/billing volumes?

Like nothing. Nothing is basic for our clients' revenue and our fixed price basis for the transactions volumes what we have in bookkeeping and so on. And maybe some comment what I could add for that is that in Finland, we have totally all clients are in fixed price method. But in Sweden, we are moving from hourly basis to the fixed price. And this has been also some effect for our revenue because we have not been so much work to be done, and it has been hourly based revenue. So it will also decrease our bookkeeping revenue as well. But yes, this is the shorter status.

And the next question from Daniel Lepistö, Danske Bank. As you will continue acquisitions in Spain, what size of an organization would be sufficient for you to become cash flow positive there?

The cash flow, it's already turning to positive with this volume. What we have right now, it was EUR 5.5 million. And the annual revenue is, of course, bigger because we have made significantly these acquisitions in Spain. So we -- at the moment, we are sort of in the limit. But roughly, this is really roughly figures, but let's say that between 2030 annual revenue, we could stop the acquisitions and turn it to more organic growth. Then we think that we have sized enough that we can have proper supporting functions, and also that the supporting functions are not -- is not taking too large share of the whole business size. And then we could continue also the organic growth. So that's really a rough figure what we are aiming to when we could turn the acquisition growth down and continue with the organic growth.

Yes. And today, our revenue management is between EUR 12 million to EUR 14 million in Spain.

Yes.

Okay. And we have no further questions in the chat or in the line. So back to you for final remarks.

Thank you all of you who followed our release. We have many, many positive things ongoing in Talenom in this accounting industry. This digitalization boost will also boost our own business. So let's take the position, what we could have. See you. Thank you.

Thank you. Bye-bye.