Talenom Oyj (TNOM) Earnings Call Transcript & Summary

Hello, everyone there in online. You are welcome to Talenom business review of Q3 and updated strategy. I'm Otto-Pekka Huhtala, CEO of Talenom, and here is my colleagues. Christian Dieroff, Country Director of Sweden.

Hello.

Hello, everybody. My name is Matti Eilonen, and I'm CFO of Talenom.

I will start from the updated strategy. It's a hot topic today. And after that, Christian is telling more about our software project in Sweden. And after that, Matti will say more about our latest financial figures. So thank you. Let's go. Target stat is the good starting point. And I would reply that we -- our ambition is the growth. We want to grow faster, more scalable and focus our core competencies. This is the basement for the whole updated strategy. Some drivers which are boosting our accounting business industry. The worst one is the legislation. There are other things which are boosting towards digitalization. It means that because of the -- for example, invoicing will be as a mandate in Southern Europe, near future. This means that small and medium-sized companies has to also adapt for their own businesses, some software to receive and send electrical invoices. The other one is customer behavior is changing to our digital platforms. And the digitalization is happening just now because of the regular things and also entrepreneurs are seeing so much benefits for their own businesses. And of course, platforms are ready for the transformation. Some words of the European ag cutting markets and the evolution, the whole site is around EUR 100 billion, and we are now in Finland, Sweden, Spain and in Italy, and this is roughly over 20% of the whole market size. And the digitalization is accelerated by many structural changes. For example, labor shortage together with increasing regulations forces us to seek more effective practices. So it is not possible to work in this industry we are -- you have to adopt new technology because we don't have people to do same things with the old practice. As I said, of invoicing, it will be mandatory for example, in Spain where we are during this year. The transformation accelerated by digitalization offers a the opportunity to grow, and Talenom has decided to exploit this growth potential. And now we go to our strategy. There is like 3 paces. And the first A1 is that the core remains unchanged and it's like 85% of our businesses, which base it for that we have long time developed our processes and product and software for easy interfaces for customers, automation for account and that means that we have more time for care our clients. And this is like about 85% of our revenue is this accounting business. And there's like B1, B2. The first change is that we separate the software business into its own company and begin offering our software to other accounting firms and their customers. And this is roughly 15% of our net sales and the second change is that we focus on our core expertise by transferring all non-accounting services and products like debt collection banking and financial service to our partners. And we have good experience of that way of working. And this is a very small part of our businesses, which has been and also with negative EBITDA. So -- and now I will go through the all phases. So our foundation is to concert entire value chains. We understood the needs of both entrepreneurs and accountant. So we have -- we are in accounting office. So we know well what we really need. And we have developed our softwares more than 20 years. So we really know what the entrepreneurs really need. So this is the end-to-end process. What we really understand and our whole core competitive base it for that, that we really understand the both side needs. And we focus on our core expertise easy. We make our customer life easier. And automation, we use the latest automation technology and AI tools and so on, and we make our accountant life easier and this means that we have more time with our clients for care, premium services. And we have made like about 50 acquisition in previous 5 years, and we have reflected that which has gone well and which has gone out. And we have created 1 Talenom concept that how to run accounting businesses well. And we have written down that in our -- this kind of concept book and base it for the systems and automations. It's the one part. And the other part is the leadership and process. And together with that, we can achieve the high profit margin and offer also premium services. And this give framework, our team leaders, our unit leaders that they can like mirror their own job against the best practices because those things -- what are in our concept as like tested, and we have evidence and this works in our business. And if you get high points of all areas being now that those themes and units will succeed. And this is like way how do we run the service business and achieve high results there. And this will give the best practice -- will give the best benefits for our customers, staff and owners, of course. And good to note that also that in previous 5 years in Finland, we have got new clients because of the good service and it's based for the good concept, not for the software because in Finland, this is the most like developed accounting business where we are in those countries, and the technical software has been available many, many years. And there is a little bit differentiate against the other software from the -- if you like put a list of the feature from the customer point of view. So how do we win the new clients, we win because of the good services. And this is good to know. Ten years before, we won new clients because of the software, but today because of the service. Okay. Separating the software business will accelerate scalable growth. And we have a unique market approach, as I told, the strength of Talenom software is based of understanding the entire value chain from both the end user and providers. And this is what the other software businesses have not. And the software has been developed on the top of efficient processes. Our -- this journey, how we are developing our software has started like 2002 from the customer interfaces. The first area we focus for that. And after that, with -- during this period, we also developed our processes with digital tools, with customer digital tools. And after that, we also started to develop our own bookkeeping systems, and it's developed above good processes. And end of that, we see very good results. Of course, this will strengthening management of this like from support units to business unit is -- will give more transparency and helps them to lead software company and also it can focus easier and better for those main clients' priorities. And our target is from EUR 0 to EUR 10 million companies. And no, we don't need to like focus for the bigger ones and keep those kind of clients in our focus. And this means that we can use some other software also for the biggest ones in service side. Okay. The second changes on nonaccounting services and products are offered to clients through a partner ecosystems. We are developing our partner ecosystems and this means that we only develop core services and software, we don't combine with our partners. And we want to be most recommended partner for financial management and services such as banking, collection and financings are delivered through partner ecosystems. So we believe that when we focus our own and we recommend our partners, so we have good experience that they are recommending also us. When we compare with them, so they are not so ready to recommend us. And so we believe that, that way, we are getting more business to our core services. And some of our partner services like banking services is good and important for us that we can win the new clients. But after that, it doesn't matter so much who is going to producing it and some words of Talenom software unit to be separated into its own company. So it gives transparency for the market and for the other accounting firms that how we are charging the clients so they can also see that we are going to -- charging only the end users, not the producer. So this is like fair play and open for everyone. We are estimating that the net sales will be between 15 to 20 in Finland. And the updated strategy will result in a lower cost base. The system architecture renewal has progressed, and it can be utilized by external accountants. In addition, the renewable makes it easier to bring the software to new markets. And we have heavily invested in previous 5 years, and now we are ready to go new markets, and we're going to decrease a little bit of our investment level. And this is also important part that the software unit will focus on future developing and strengthening the core capabilities of ease of use and automation, not the other feeds or features or needs what our partners can offer. The company organization is estimated to lead to the EUR 3 million annual cost savings. And the next steps are that we are going to reporting this company as owned company starting from Q1 next year. The software company will charge the end user directly for the software and the number of customers is expected to grow rapidly as the software is rolled out to existing customers, especially in Sweden and Spain and sold to external user will start. We are going to hire internalization software business expert to lead the company, and this process has also started. Okay. Updated strategy is focused to the core expertise. Some of you have follow up Talenom very long times. And you can see that there is this 3 things which have been placed in many, many years, easy routines for our clients, automation for our accountant and this means that we have more time for care services and expertise services. Our vision will be most preferred financial management partner and our mission, we help entrepreneurs succeed. And in nutshell, Talenom will focus on strengthening its core expertise and grow its accounting services and software businesses. We continue to develop our excellent accounting services. As before, we're going to continue to grow, we are organic and we are acquisitions and launching software service to strengthen growth opportunities. This is the big news step for us and seeking growth through partner ecosystems. We really believe that focusing our own, we are -- we can recommend our partner, and we are getting leased from them side also. Some words of future, we are going to focus our current markets where we are and with the updated strategy, we will remove the previous medium-term targets for '23 and '25 and our long-term target is annual net sales growth of more than 20% in the software business and more than 10% in the service business. We will provide guidance for '25 later on. In '25, we will focus on future improving profitable in Sweden and in Spain, you will hear more about of Sweden situation soon, and we really believe that we are getting financial benefits next year and building sales channels for the software businesses. Shortly, we aim stronger and more profitable growth through two pillars. To conceptualize, 1 Talenom service business model and the more scalable software business. This is in shortly. My presentation and now is stage is yours, Christian. Here we go.

Thank you very much. Okay. So my name is Christian Dieroff and I'm the Country Director of Talenom Sweden. I've been with the business for about a year now. And I'm happy to be here today to present the software rollout project in Sweden. To start with, and the reason why we're doing this is we have seen so strong historical evidence of meeting the shift from a traditional accounting firm to a digital and automated accounting firm in Talenom's history. Before 2015, between the years of 2015, we started in Talenom to invest in the digitalization, moving from traditional into modern and digital. And in 2015, customer interfaces were in place and rolled out. And also in 2015, we launched the first version of our own proprietary accounting software. And as you can see from the figures, the blue line representing the comparable EBIT, the impact was really good. We moved from a quite low EBIT level. It took a bit during 2015, where we invested a lot of resources into the proprietary software and then you can see the impact in the positive EBIT effect where it almost tripled from the year of 2015 into 2020. And this is what we are now duplicating in Sweden. So the Talenom software actually consists of 2 separate interfaces. We have Talenom Online, which is created for the customer, for the business owner or for the entrepreneur. This is designed with user-friendliness in mind. It has a really compelling user interface, and it's including both the web and the mobile application so that you can manage your business on the go with invoicing, making payments or following up on reports. Talenom Accounting, on the other hand, is developed for the accountant and with the accountant in mind, it emphasis rural and AI-based automated accounting, automated controls and checklists and is built to avoid contact switching. So having 2 separate user interfaces for each of the different target groups really is a key competitive advantage for us in the accounting software market. Unlike other solutions that are out there where the consultant and the customer usually work within the same system, a system that isn't really tailored for either. We have created different user interfaces that meet the separate requirements for each of these 2 user groups. So let's have a closer look at the benefits of the software in each of these user interfaces. To start with Talenom Online. And I mentioned before, this is created with the customer in mind and with a focus on simplicity and easiness. It has a user friendly interface and appealing and customers can manage their business on the go, for instance, pay invoices why you're in the taxi in between meetings or you can even send the invoices while you're waiting to pick up your kid from hockey practice. So easiness and mobility. Also, customers can manage their entire company or even multiple companies using 1 single application and log in with all information stored in one place. You can upload receipts by taking a photo or simply drag and drop PDFs or images in the web application. And in the application, you can also find contact information to your accounting team or to the customer support team if you have any technical inquiries. As it's built on a high level of automation, Talenom Online enables real-time accounting, which really supports informed decision-making. Some key features that stands out on the Swedish accounting software market are the one-click payment functionality, which means that you can approve an invoice and pay it at the same time without having to log in separately for a second approval in your online bank. The automated accounts receivables, which is possible made through bank integrations, the dynamic reporting views, which not only presents a dashboard where you can get a good overview of how your business is doing, but you can also do drill downs on each separate account for more details. The EC document import process with mobile photo functionality or drag-and-drop functionality within the application. And the secure upload of documents and storage in the application, where you can save for instance, annual report, audit reports or Board meeting minutes. Moving into Talenom Accounting. The production system where the bookkeeping is handled. This system is created for the accountant and it's created by accountants looking after the accountants' needs. It -- the material -- delivery material into the software is simple. It's electronic and it's often in real time and the daily processing of payments together with rule and AI-based accounting really increases the automation level. The software also includes automated checks and documentations for month-end closings, which is both an efficiency booster, but it also lowers the risks of human errors. The lean principle-based workflow is really easy to manage, which frees up time for the accountant to instead spend on proactive consulting and customer engagements. And since the majority of the work in the software is handled automatically, it really helps the accountant to plan and manage their work and workload while you have a internal customer supports team that helps you to focus on customer matters. Some words about the current status of the software rollout project and the next steps in Sweden. So the rollout of the own platform is progressing very well with 40% of the customer base already migrated and with a target to reach 50% in 2024. Talenom Online is now part of our new customer acquisition strategy and is the default software that we integrate in the service packages that we offer to the market. Customers are generally pleased and providing us with positive feedback regarding software features. And they are specifically highlighting the drill-down capabilities in reports, the simplified payment process with one-click pay and also the easy-to-use interface with dashboards that includes everything in one place, which really saves time in their daily routines. Accountants are also highly positive and are recognizing the significant time savings that can be made through the rule-based automated accounting and a system that is also designed to avoid contact switching. I am very happy to say that in some customer cases, we have already seen up to a 75% reduction in time spent on routine tasks. And as with any change, it takes some time for the users to adapt. So currently, our accountants and also our customers are adapting to the new software. And we expect to see the first financial benefits of the new software and the related processes in our P&L by H2 2025. Now, I'll hand over to Matti for a summary of the review period.

Hello, again. Welcome also from my behalf to follow this Q3 review. First, I will start with a few important topics briefly, and then we will continue to the group figures and country-specific figures more deeply. Our growth was 5.5%, and it slowed down from the historical level. The most came from the economic slowdown in Sweden and in Finland, and that has slowed down our growth. Also, we made fewer acquisitions in overall. So that's why the growth has been a significantly lower pace than earlier. On the other hand, our profitability jumped up, measured by EBIT. We were 15.5% upwards. And that was because profitability improvement plan in Finland and also, we were able to increase the volumes in Spain, and that increased our profitability. Also, we renewed our strategy in beginning of October, and Otto already opened it up, and I won't repeat it here again. Our expansion to the other countries is going according to the plans. We are now present in Finland, Sweden, Spain and Italy. Italy is really a small portion of the whole thing, but we are present there also. The revenue is divided between countries, so that 68% is in Finland right now, 20% in Sweden and 12% in Spain. And then the three topics about our strategic progress during the whole period. We started this year in our minds that we need to improve the profitability, and that's what we got, especially in Finland when we launched this measurement of efficiency improvement and the profitability improvement. And that has significantly helped us building up the profitability. Also, the business volumes are bigger now in Spain, so that the supporting functions and the fixed costs are taking the small portion -- smaller portion of the whole cost structure. In Sweden, we are a little bit in different phase. We have completed a significant amount of integration projects right now there, and we are really focusing on implementing our own software in Sweden. And that has also bring it down -- brought down our profitability. But we are certain that this -- this will improve our efficiency in the longer term, and it will help our profitability gain there. And also, it will be good for our organic growth. We also strengthened out our organic growth, and we have developed our digital purchases back in Finland. We have got some new good results on that side, and we are also importing that to the other countries as well. Okay. Let's move to figures then. So the growth was 5.5% ending up to EUR 97 million altogether. The growth slowed down on the last period -- last quarter a bit, it was 3%. Majority of the growth came from the Spain through the acquisitions and the economic downturn in Finland and in Sweden has significantly slowed our organic growth. We were seeking for the profitability improvement, and that's what we got measured by EBITDA. We ended up to 30% for the full period and also on the last quarter. The EBITDA ended up to EUR 29 million. The operating profit was EUR 11.4 million and also the relative profitability improved a bit. The majority came from Finland, as sold earlier and also from the Spain when we were raising up the volumes there. And on the other hand, Sweden, software implementation and numerous integration project had brought down the profitability there. And let's move to country-specific figures. All in all, in Finland, the revenue was declining a bit. It was 1.5% declining for the full period and pretty much on the same level on the last period. The economic slowdown has affected on our customers. Their volumes at the moment are much lower level in certain fields, and that has significantly has an impact on our revenue as well. So that the revenue per customer is a bit lower through the volumes and also price adjustments. There has been also an increase in the business closures and bankruptcies, and that has also affected on our revenue level. At the same time, our sales, getting the new customers is performing well, and that has compensated the revenue slowdown. We just recently had the customer satisfaction review in Finland, and that has been on an excellent level that it has ever been. We also, during this period, have prioritized the customer retention so that we are in a good position when the economic start to be better in the future. We estimate that the economic downturn will ease up when the interest rates are coming down, and that's what they have done, and it will continue. But the effect will come with a slight delay to us as the economic downturn came to us with the 6 months delay, so will be the economic upside also. The EBITDA development in Finland was rock solid. It was 40% on the full period and the record we made a record. It was 41.4% on the seasonably weak period of Q3. This is a solid proof that what you can achieve when you have highly automated and very well-led processes with our own software support. Then let's move to Sweden. Sweden also had a declining on the revenue for the full period, about 2% and almost 10% on the last quarter. The same kind of phenomenon as in Finland has affected on our revenue, the same kind of volume things is happening in Sweden. So I won't repeat those reasons, but it's really the same kind of environment. And on top of that or addition to that, we have made significant changes in Sweden. We have made many integration projects we have implemented our own software there. And that has led to the situation the staff retention, it's much on a higher level, and that has also led to the customer chain. But in future, we believe that when we implement our own software, our own way of doing, it will be beneficial for us in the future. The EBITDA level in Sweden was pretty much 0 on the full period and negative EUR 0.5 million on the last quarter. And this is because the economic downturn, combined it with the resourcing of the own software implementation. And here is a little bit why we are doing this own software implementation. We have about 40% of the EBITDA in Finland. And this is a solid proof what kind of profitability we can gain through the highly automated and highly efficient processes. Overall, in Sweden, we have, overall, the -- the EBITDA is about 10% in accounting field in Sweden, and it is about 0 at the moment in our company. I'm having difficulties to see.

Any problem?

Can I continue? I can't continue.

Sorry about that. I hope that Matti has everything all right. But I can continue shortly, the financing figures. And here is the figure how the EBITDA margin has developed in Finland and in compared to Sweden. And this is what we are seeking from Sweden that we characterize our EBITDA margin at the same level as we have in Finland with our software and good processes. How the net sales developed in other countries? Most of these figures come from the Spain, Italy part of the figure is very small. And as you see, net sales increased more than 100%, and we achieved about EUR 12 million revenues in cumulative this year. And quarter 2 revenue increased 56%. And most of the net sales growth came acquisitions, but still our organic growth is rolling well there and our offices are selling well our services, and they are growing organically. But because of the big volume after acquisition, so that's why it's not so big part of the growth. But some of our offices, they are growing organically from 5% to 15% annual. And EBITDA development in countries improved well from minus EUR 0.5 million to positive EUR 0.5 million. So the development is like EUR 1 million, and it comes from the -- because of the volume of the business has increased so well. So now it's like scaling when the volumes scale up. So the profit margin is also increasing and the reason behind that is that when we started in Spain, we invested for support functions. And now when the volume is increasing, we don't need any more support functions to increase and the profitable margin will increase. Shortly outlook and guidance. We updated our guidance beginning of October, and we are waiting that the net sales is around EUR 126 million to EUR 129 million; and EBITDA, EUR 34 million to EUR 37 million and operating profit between EUR 11 million to EUR 14 million. And Matti explained it before the reasons of resistance and so on. This is shortly our presentations and now will be time for the questions. So me and Christian are here to ready for answer. Thank you.

Can you elaborate and explain what are the competitive advantages of your software if we compare it to, let's say, Fortnox and Accountor software?

From end-user point of view, we can say that it's easier to use. But if you like look only the feature, how many features there is, we have not so many features, but those features that we have are easier to use. And we know that some clients which have leaved from Talenom, so they want to continue to use our software because it's so easy, it's made for the people, for the human, not only for engineers or expertise. And for accounting business point of view, we can make more profitable business. It's the selling point, certainly.

Do you have to make new investments, the sales now when software and services are separate? And how does the sales process of services and software differ?

Yes, I will start from the current status. So we continue our sales as today. When we are winning new clients, they're separated like accounting business in offer and separated part of the software that we are going to charge. So this will continue, and we are like selling the whole package as today, also for future. But for the new existing only the software clients, so we have to hire some people to communicate it and sell it -- sell to accounting offices, and we are going to sell also directly digitally to end user. So we are like more or less 3 channels for that.

And lastly, software implementation in Sweden has caused some churn, what's the situation the same in Finland about a decade ago?

Yes, I can say. But in Finland, that time, we had in place very high-performing sales force and our churn rate was like over 15% that time, but still we grow and because of the good sales organization. And the environment was so kind of that sales was easier than today because we only demonstrated our platform and everybody was so, oh, this is so nice, and I want to answer it. But today, selling process is much more difficult because we are winning with better services and customers are seeking the references and so on and it's the more tough market today than that time when we had high customer churn, and we still grew because of the easier way of selling.

No further questions.

Okay. Thank you very much all of you, and see you next year. Bye-bye.

Thank you. Bye-bye.