10/26/2023

speaker
Daniel
Chief Executive Officer

Good morning and welcome to our presentation of the third quarter. This is the agenda for this presentation. I will start with some highlights of the third quarter then give a business and market update and then I will hand over to Sven Martin who will give a financial update. So let's start with the highlights. During third quarter we have continued our transition to a more focused and nimble organization with a lower cost base and working very much closer with our customers. If you look at the ARR growth, we are growing more or less in line with history. But in Norway, we're a bit behind. And the reason for that being that in Norway, our systems in Norway typically have much lower customers and much longer sales processes. But we have a very good pipeline that we'll get back to a bit later on this. The inorganic growth in the quarter is coming most from HPI and Confrere. I have to mention briefly Confrere is the product where we bought the customers and the brand a little bit more than a year ago. We're still paying for the old technology, so all revenue we get from that product goes directly to the owner of the technology. We transition those customers to our own platform during the first six months of next year, lowering our cost considerably in that area. During quarter, we have also started distributing roughly 250 million NOC. This comes from our strategic review, where we have concluded that we do not need all the cash we have on the balance sheet. We have very many exciting acquisition targets, but we want to go ahead at a sensible pace, make sure we do good deals and that we can handle them correctly. So therefore we have realized that we do not need all our cash the coming two years. Looking also at WebDoc, in the quarter we signed 28 clinics, roughly where we usually are. What's worth noting is that in September we had a record month with the most clinics ever signed, which I'm very happy about. Continuing to the business and market update, We can see here that our revenue is not the best quarter from a revenue perspective. It never is for Karasent and this trend has been strengthened by the acquisition of HBI which do many tests and we do very little tests in the vacation months. What you also can see here is that we improved significantly on cash EBITDA. That's a result of the cost-cutting program, obviously. But also worth noting is that the third quarter, if it's not that good from a revenue perspective, it's really good from a cash IBTA perspective. So we have some vacation effect in those 11%. So for the next quarter, I expect that to be roughly flat. And then we continue to grow into our cost base. IBTA is improving the same way as cash IBTA. And that's reflecting our focus on our present products and investing in them, and also a bit more conservative view on capitalization. In general, we really focus on cash EBITDA and not EBITDA. So what are we focusing on at the moment? There are three areas that are my main focus. It's sales, it's to grow into our costs, and launch web.exe. In general, we focus on selling our present product and the way that's been done historically is mostly by word of mouth. That's really a key. So the investing in present products really improves in that sense and it will help sales going forward. And I think a good evidence of that and early lead indicators, so to speak, of sales is that the number of support calls has been lowered by roughly 40% the last six months compared to the same six months the year before. that's even though we have more customers and it's really a result of working a lot with the product getting rid of bugs improving functionality which has had the most negative effect for our users so we really expected translate into more sales we are also testing and experimenting with many new types of sales, working with inbound marketing and strengthening the organization within both sales marketing with new people and competences. We are also investing a lot in home pages, search engine results and branding, where I think we've been lacking a bit. In Norway, where we are a bit behind, it takes longer because those products are heavier, it takes longer to sell in, the typical customer is larger, and the implementation process is much longer. With WebDoc, for example, where many customers who are live within a month of signing up for WebDoc. For our Norwegian product, it takes much longer, typically a year-long process, but much larger contracts on the other hand. What I'm really happy about is the pipeline in Norway, and where we also signed a letter of intent with a very large customer. which I hope to be able to present a finalized deal with in short. And in general, it's good to notice we're not aiming at selling consultancy services. We want to have recurring revenues. So if there's any place we give rebates when selling a product, it's on the consultancy side. And that's something we're really pushing in that direction make sure that we have good recurring revenues, and we don't want these lumpy results moving up and down. Looking at our cost structure, we took down the cost structure quite a lot during the second quarter. We're still investing a lot in our present products. We're still at quite a high cost level, which we aim to grow into. A lot of the part will be, of course, improving on our sales side, but also make sure that we run a tight ship, so to speak, and that we have control of our costs. We have two products which are not really living up to our expectation in the quarter and the last couple of quarters, and that's HBI and Adopus, where we therefore have decided on five million of additional savings on a yearly basis. That's starting by the end of the year. It should be noted, though, that those are savings within those products. We are also investing, as I mentioned earlier, in marketing sales and also compliance. So the important part here is to keep costs under control, make sure that we go in the direction we want, and keep costs steady, so to speak. There's also a lot of focus on costs, where we can do quite a lot. That's not really been our focus so far, but we start working quite a lot with that. The third area, which we're working a lot with, is the launch of WebDocX. And WebDocX, for you who doesn't know, is our brand new system, HR system, where we take all the learnings from WebDoc, which is an excellent system, but built for the Swedish market, where we take all the learnings from that, building a completely new system from ground up, targeting Europe, and where we putting a lot of effort in in the last quarter is visiting potential customers in different countries, really understanding the market dynamics, the competition, what are customers looking for in each market, and then deciding on which market to go ahead in and in what way. And I really look forward to talk more about this, much more about this on our Capital Markets Day, December of November. So I hope that all of you can make it. With those words, I will hand over to Sven Martin.

speaker
Sven Martin
Chief Financial Officer

Thank you. So looking at the financial highlights of the quarter, we had the revenue growth of 17%, where organic growth was 7%. Recurring revenues and net retention rates grew in line with the previous quarters, approximately, while EBITDA margins of 8%. was quite flat, but cash EBITDA improved significantly compared to Q2. And we had an ARR of 222 million NOC as per September. So our revenues ended at 56 million in Q3, where we had the recurring revenues of 95% of total revenues. And organic growth was, as you can see on the bottom side of the graph, lower than it has been the previous quarters at 7%. And that is a result of low consulting revenues, as Daniel mentioned. So Metodica has been the main driver of consulting revenues during the first half of the year, and Metodica during Q3 focused on other projects, and that mainly includes winning new business, which we hope to see effects of going forward. Also, our Norwegian EHR system, Madcuris, finished a large customer development project before summer. and also focused on recurring revenue growth in the third quarter. So that is our main strategic focus. Recurring revenues grew 13% year over year, which is quite in line with the history. If we look at the decline in recurring revenues from Q2 to Q3, from 56 million to 53 million, that is mainly driven by currency effect. of 2.5 million, and also the transaction-based revenues, including, for example, SMS and HPI test, as mentioned, are typically very slow during the summer months, which we also saw last year. When we take a closer look at where the recurring revenue growth comes from, we had the net retention rates of 108%, as mentioned, and this is driven by a net upsell of 10% and the churn rates around 2%. And churn rates has been around 2-3% for the last couple of years and that is also including involuntary churn when people go out to business and retire etc so it's a extremely strong position we have we operate in protected niches and we truly have a business critical system for our customers so it's a way we now focus a lot on our customers and developing functionality we also see that we have an excellent position to build from. New customers accounted for 5% growth in the quarter. And that's relatively in line with what we have posted the past few quarters. And we are doing a lot now where we focus on driving this ratio through the sales initiatives, but also on the product development side. Looking at our cost base, we had completed the cost savings program in Q2, as mentioned, where we had cost savings of approximately 40 million on an annual basis. And most of these savings had taken effect in Q3. The 15 million decline from Q1 is also partly driven by holiday effects as we have lower personnel costs and salaries during the summer months. But the main driver is still the cost savings program. And we now have a cost base where we aim to grow our revenues and scale into this cost base as we still have a lot of capacity in the organization for growth. Looking at the profitability development, we see that the EBITDA margins is quite flat during the year, but the capitalized development has decreased significantly as a result of the cost savings. We have improved cash EBITDA from Q1 to Q3. We see an improvement of 12 million on cash EBITDA level and improvement since last quarter of 5 million. And the target here is to keep costs quite steady for many quarters going forward and grow our revenues. and then scale our margins as we do that. With that, I can open up for questions.

speaker
Operator
Conference Operator

If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad.

speaker
Sven Martin
Chief Financial Officer

We have got some questions in the chat, if there's no one on the phone. First question from Anders at Solarstein. Can you share what you will be doing to lower COGS more specifically? Yeah, sure. So there is a couple of different initiatives. where the first initiative is what Daniel mentioned related to Confrer, where we have 100% COGS on the revenues as of today. and we aim to move the customers to our own product where we basically have no cogs. Secondly, we are working on moving some of our customers in the Norwegian market from a semi-cloud solution to a fully web-based solution, which has been done for Adopus in Norway, where we basically have very high costs on the revenues as is on the current solution, but the new product will have lower COGS. And thirdly, we are working quite systematically now on negotiations with our supplier on the different levels, where we see great potential now that we have the scale that we have to do something about the costs. Next question from Richard. The number of developers is still very high. In relation to total ARR, meanwhile ARR is stalling over the last few quarters despite efforts to revamp sales. When will the very large investments into WebDocX start to generate any returns? And is Kyrocent still too cost heavy at this growth rate? Reasonable profitability levels will take many years to achieve.

speaker
Daniel
Chief Executive Officer

Thank you for that question. Yeah, for sure we haven't. focused on maximizing cash EBITDA at this point in time. We believe very much in our products going forward. So we really believe in investing in them. I think when looking at the number of developers and you're into that, Rickett, many are working with WebDocX which do not have any revenue. So when looking at number of developers in relation to ARR, I think you should not include developers working with X. because X is not driving any revenue at the moment at all. We still believe very strongly in X. Looking at the European market, the Nordic countries are ahead. WebDoc is an excellent product. It's very well liked both by the people using them and management of our customers. And taking what we learned from that, both good and bad, and doing an even better product for other European countries with much lower markets make a lot of sense especially since some of them are just at the moment opening up to cloud-based solutions. And then the question, and it takes some time, I think, for efforts to translate into growing sales. I think we will see step by step, it will improve quite significantly. The basis for sales historically has been the word of mouth. And as I mentioned before, many of our customers felt that we're not really there for them. The last couple of meetings we had with major customers have been very positive. And we keep putting out a lot of new functionality. We also will add new customers if we talk about WebDoc. In Norway, we really have these very long sales processes. It takes typically like one or two, almost two years for a lot of customers to translate into ARR. from signing of contract. So for example, the letter of intent I mentioned earlier, which would be a very large customer for us, that would take roughly one half year before it translates to ARR. There would be some consultancy revenue on the way, but that's not where we're focused. We're focused on getting a really good ARR in one half year when that contract starts having effect. So what's really good to know is that we're building it for the long term, not here now. also investing a lot in the home pages marketing efforts some things work some things doesn't so we're testing and I think it's important to test none of our competitors are really doing any kind of inbound marketing so we have to see really what works but it's we have good people on board doing that we're adding a couple of more concepts actually within that area at the moment so we have high expectation of our ability to grow sales.

speaker
Sven Martin
Chief Financial Officer

Okay. Next, we have a few questions from Mark at Red Dye. Could you comment on the transaction-based revenues and consulting revenues besides slower summer months? Has anything else happened here? Previous Q3s have often been flat-ish, quarter over quarter. not least on the recurring revenue side. The sizeable pattern seems to be somewhat new, and you mentioned HPI. Is it something more? So I can start. I would say the development quarter over quarter is partly driven by currency, as I mentioned. Without currency, it's quite flat. And then also, HBI has a business model that's almost exclusively linked to volume and tests. So when we have slow months, we have very low revenue. And when we have active months, we have high revenues. makes the effect stronger. I would say if you look at the development quarter over quarter Q2 to Q3 last year, we saw the same trend, but the figures were a bit boosted by the acquisition of Confrere in Q3. That was the reason it was flattish, but if it hadn't been for that, it would be a decline there as well. I would say it's nothing new on the seasonality, except the HPI, which enforces it a bit. Consulting is lumpy. It will vary from quarter to quarter, and I would say we had a very active first half of the year. And the main focus for us is the recurring revenues. Next question, has the variable revenue picked up pace again after the summer months? Yes, I would say there's nothing changed in the seasonality aspect of that SMS and test revenue compared to previous years. Do you expect consulting revenue to pick up pace again, or was it impacted by a few finished projects?

speaker
Daniel
Chief Executive Officer

quite a lot were finished projects during the first half and it's really not the focus of our in getting that type of revenue. Consultancy is great to get our customers to use our products better and to improve products for our customers but what we're aiming for is to build profitability through ARR and that's really our main focus and Looking at, for example, when we're selling WebDoc at the moment, we're trying just to get really, really happy customers. And an important part of that is that you get good education, that the system is implemented really, really well. And I know this first time from being a caregiver, that sometimes was a problem. And you try, as a caregiver, you really want to guard your cash, right? So the implementation cost is something that you really don't like. And when it's time to change your system, you know that you will be standing still for a little while with high fixed costs. And then on top of that, you have consultancy. You have to pay for the implementation of the system. So it's much better for us to give rebates that. That lowers the threshold for customers to join, for example, WebDoc. And then we pick it up through the ARR over time instead. And that's how we're thinking all our system. And also, if they do not cheap out on the implementation phase, they would be much more happy with the implementation. So we started measuring all implementations, what our customers think about it, because once again, word of mouth is really important for sales. We're trying to move into other areas of sales, but it's been the main driver, at least historically. And the last couple of implementations, we have had an average score of, I don't remember, 4.5 or 4.6. So really high scores for implementation. And that's when the customer says, How happy are you with the implementation overall of WebDoc? So we did really well there, which we also expect to translate into the States going forward.

speaker
Sven Martin
Chief Financial Officer

I think the next question you talked about, Daniel, but could you talk about the pipeline you see in general, larger clinics for WebDoc, the Norwegian market, et cetera?

speaker
Daniel
Chief Executive Officer

Yeah. So if you start with WebDoc, we had a record number of clinics, but they were quite small in September. A key part into getting up to large clinics is doing the surgery module. Surgery is typically much larger clinics. Then we talk about employees between like from 35 up to 150 employees. So really big clinics. Also an area where the competition is, I would say even lower than in other areas. We have started discussing that module with customers, having really good responses. But that will go live in a first version roughly next summer. So it will take some time for that to translate into lower customers. But I think in general, the work we do with improving word of mouth, improving sales through new home pages, new outbound or inbound tactics and so on, will translate into more sales. But it will take some time for us to really know our way. We're looking at Norway. We have the systems that the large customers for us, the large systems we sell in Norway, they typically have large customers, much slower processes in sales. So the discussions are long, like six to one month to a year almost sometimes before you sign up. And then the implementation is another year at least. So it takes time to go into say that the positive part is that one large customer has revenue for quite a long time. And then what we've seen in Norway with the office where it's been a large customer needed to grow for quite some time. We're done with implementation of that customer and we are now working on getting the next large customer online for that system. What we need to make sure going forward is that we do not get these timings in between that we always continue to sell so that the organization is robust enough to even as you are implementing a large customer, which takes a lot of effort from the entire organization, that we still have the time to work with new customers. So that's not standing still while we're implementing a large customer. I think it's an important area. And as I mentioned, we have also signed a letter of intent for a large new customer in Norway. And I really expect it to translate into a deal quite soon. And that case would be the largest deal so far that we've done in Karasent with customer. So we really hope to get that finally signed within short.

speaker
Sven Martin
Chief Financial Officer

Great. Next, what can you do with COGS? I think we answered that. And then how do you view the organic growth rate in Q3 compared to previous quarters? Do you expect organic growth to bounce back during fall?

speaker
Daniel
Chief Executive Officer

Yeah, I expect ARR to start improving. As mentioned, the Norwegian customers we signed take time before they translate into ARR. but they translate into some consultancy revenue on the way there. So that's good. And then, yeah, all of these efforts we're doing, and we're doing really a lot. Our marketing team now is four people. And if you look at our homepage, yes, or you look at our material, we are updating it step by step. uh doing research and optimizing buying ads and so on uh doing cold calls we're testing a lot of different things um but you can for example go into webdocs homepage and you see that there's some work to be done and that's what we're investing in at the moment also to make sure that when you're looking for a medical record system in sweden you will have a webdoc on top and that is sold from webdoc.com and not some other address it's really clear what you can buy and that's a strong site for you to buy on so it's in all areas we're improving our sales process and material around it yeah do you expect to grow into your cost structure next year okay that's not what you mean i mean over time and we talked about this at the capital market day uh we want to have really good margins and that will take some time but we get back to that they can demonstrate.

speaker
Sven Martin
Chief Financial Officer

From Ricard, you mentioned a large development project for an individual customer. Are development projects for individual customers part of Kerasent's strategy?

speaker
Daniel
Chief Executive Officer

No, not really. So we're moving away from that. The development projects we do now for customers are mostly just as a result of sales. Some of our, especially Norwegian systems, are implementation heavy. So WebDoc, it translates from sales to implementation really, really quickly. Sometimes when I'm using an already known system, it's in a day or so. So it can be really quick for a small clinic. But also for large clinics, with WebDoc, we're very quick. So setting up a system. The Norwegian system for our Norwegian customers takes much more effort, and there we have to get paid on the way, but that's not where we make any good margins, and that's not where we want to make a margin. So it's not an important part of the strategy from the point of revenue, but it's an important part of getting new customers online for Norwegian systems.

speaker
Sven Martin
Chief Financial Officer

Next question from Adam. You mentioned that you will use the remaining cash balance for acquisitions. Can you elaborate on your pipeline and what type of acquisitions you're looking for?

speaker
Daniel
Chief Executive Officer

Yeah, so in the near term, we have a long list of potential targets. Targets that would really strengthen our position in our present markets and would add value to our present products. uh but the main aim uh in the short to medium term is uh to enter a new geographical market with web.x i think it's very important to do that through an acquisition um because to really know the market understand the customers have some customers to start working with have some feet on the ground and not starting uh with the blank page so to speak so that's really what We focus on the near term. If there are any positions popping up that we have on our list from our strategic review, we will take part in those processes, but we're not starting. We do not initiate any process at the moment. Also, I think in the private market, price hasn't come down as in the public. So far, what we've seen, so it also have to, the acquisitions have to make sense from a financial perspective.

speaker
Sven Martin
Chief Financial Officer

Yes, next question from Simon at Danske. Did you lose a big WebDoc customer in the quarter? This is the first time WebDoc is not growing sequentially. I would say when you look at the figures that we report on WebDoc, it's affected by currency as well. If you compare it to Q2, where we had a currency of 1.02 NOCSEC, and now we have So that is the main reason for the development. We didn't have a lot of new implementation during July and August, which is typically the case during summer. So that's the main reason for the trend. Emilia at Team B. How should we think about growth and profitability going forward? Should we expect gross OPEX to be flat going forward or could we expect further cost reductions if you're not successful in driving accelerated growth disregard Web.x?

speaker
Daniel
Chief Executive Officer

So we'll get back to our financial targets soon at the Capital Months Day. But in general, Our different products are growing at a different pace and doing different well, so to speak, from a financial perspective. We have a clear budget and plan for each of our products for them to reach good levels of both growth and profitability. If they do not, then we'll do further cost cuts, but that's not our main strategy. We believe in the products we have. We believe that we can win customers. The challenge is a bit that many of our products haven't been out trying to win new deals for quite some time. Because the main goal before was the one customer. So we haven't really been out meeting customers. So for example, in our organization, we have a head of sales, which we never had before. I started, I think it was somewhere around March. Ingrid, the head of that organization, haven't had time either to go out and meet customers. So now we're out really meeting customers and it takes some time for that to translate into sales. But we believe strongly in the products. We have a good pipeline in Norway. So I'm quite confident that we will gain there. There we have, as you always have, minor issues and if in any part of Kazan those get too big, we will defer the cost reductions. We can, and there is room for it. But at the moment, we believe strongly in our products.

speaker
Sven Martin
Chief Financial Officer

On the operating free cash flow EBITDA minus CapEx, you say most cost reductions are in full effect in Q3, but still EBITDA minus CapEx is at the same level as in Q2. Why is this? It's not really at the same level in Q3. EBITDA minus capex at minus 11 million in Q2, and minus 6 million in Q3. So it was negative 18% of revenues in Q2 and negative 11%. So we saw an improvement of 5 million, and that's mainly driven by cost savings. I would say, and also some seasonality, of course, but that also affects revenues. From Jens at IS Fern, can we expect clear communication related to targets in terms of revenue growth, operating margins, and timelines at the upcoming capital markets day?

speaker
Daniel
Chief Executive Officer

So as I think you all know, if it would have taken those decisions already, we would have had to send them out to all of you. That's something that needs to be communicated directly when those are taken. But I expect that we'll be able to give you a good view of what we're aiming for at the Capital Month today. And especially what those stories will look like when we present at the Capital Month today.

speaker
Sven Martin
Chief Financial Officer

Next question from Amelia again at DMB. ARR growth was 20% year-over-year. What was the organic ARR growth? I could say that it was in line with the recurring revenue growth organically that we posted. And the final question we have gotten from the audience is from Richard. Is there a timetable for targeted revenue generation from WebDocX? Will you discuss this on November 7th?

speaker
Daniel
Chief Executive Officer

Yeah, we'll discuss WebDocX on November 7th. I think it's important to have The coming years, the coming two years at least, our improvement both in terms of growth and profitability will come from our present products. It takes time to launch a new system. So looking at the coming two years, something like this, it will really come from our present products and possible acquisitions. And after that, WebDocX should help pick up the pace. But what's really important for BlackX is to find the right markets, which we believe we have, and that they start developing together with customers in that market to make sure that we have a really competitive system. But we'll come back to all of this on November 7th.

speaker
Sven Martin
Chief Financial Officer

Okay, that was the final question. You want to wrap up?

speaker
Daniel
Chief Executive Officer

Then I would really like to thank everyone for all the questions and for the time. I hope to see as many of you as possible on 7th of November. Thank you for today. Thank you.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-